After 20 months of a wrenching reorganization, Northwest Airlines got approval on Friday to emerge from bankruptcy protection into an industry besieged by higher fuel costs and crowded with competitors.
Eagan, Minn.-based Northwest Airlines Corp. announced it would exit bankruptcy on May 31, after Judge Allan Gropper approved its reorganization plan Friday. Northwest, the nation’s fifth-largest airline, also plans to announce any post-bankruptcy marketing plans when it emerges.
Chief Executive Douglas Steenland said the company had reached all its bankruptcy goals, which included cutting annual operating costs by $2.4 billion, reducing debt and lease expenses by $4.2 billion a year and shrinking the overall size of its business.
By its latest count, the company employs 30,787 full-time workers, down from 33,755 in the quarter when it filed for bankruptcy. Its remaining flight attendants, pilots and other workers took pay cuts to help the company achieve its goals.
“I want to thank our employees for their hard work and sacrifices that helped Northwest attain its goal of repositioning the airline for long-term success,” Steenland said in a statement.
Nearly 97 percent of creditors eligible to vote on the company’s reorganization plan approved it.
Under the plan, Northwest’s secured creditors will be paid in full. Most unsecured creditors are expected to be paid between 66 cents and 83 cents on the dollar in new shares of the reorganized company. Existing shares will be canceled, leaving shareholders with nothing.
Once the company emerges from court protection, its shares will begin trading on the New York Stock Exchange under the symbol “NWA.” On Monday, the shares will begin trading on a “when issued” basis, meaning the shares have been authorized but not yet issued.
“They’re going to be in a very strong position,” airline industry consultant Mike Boyd said. “They have a strong vision of what they want to do. If you’re going to bet on an airline, I’d bet on them.”
Boyd notes that Northwest will be able to build its growth around a global hub in Detroit for access to China as well as a hub in Tokyo.
Northwest has been operating in bankruptcy since Sept. 14, 2005, when it sought the court’s protection from quickly rising fuel prices and other cost burdens.
Atlanta-based Delta Air Lines Inc. also filed for court protection that day. Delta left bankruptcy on April 30 after terminating its pilots’ pension plan, cutting labor and operating costs, restructuring its fleet and reorienting future growth toward expanding international flights.
After Sept. 11, 2001, UAL Corp.’s United Airlines and US Airways Group Inc. went through their own restructurings. Both have since left court protection and face renewed threats from Northwest and Delta as those companies execute their post-bankruptcy recovery plans.
All the airlines face cost challenges such as higher jet fuel prices and less flexibility in setting ticket prices. At the same time, the industry’s success in lowering wages has created a new problem: attracting and retaining workers, from flight attendants to pilots who are willing to work harder for less money.
In seeking approval of its plan, Northwest faced opposition from its three biggest labor unions, which were unhappy over plans to give 400 top managers a collective 5 percent equity stake in the newly reorganized company. The company estimates that stake is worth $297 million.
The plan gives Steenland an estimated $26.6 million in stock and options once the company emerges. It also gives the outgoing chairman, Gary Wilson, $2 million as well as medical and dental insurance for life and up to $75,000 a year to keep an office.
“There is no dispute it is generous,” Gropper said. “Any incentive plan designed to be in the top quartile would be generous.”
The board’s compensation committee set out to create a plan to help retain managers it deems crucial to the airline’s success going forward, especially as the industry loses executives to posts outside the industry.
Gropper overruled the unions who argued that the equity award plan unfairly enriched executives and had been created with improper interference by senior executives.
Northwest expects to be worth roughly $7 billion when it emerges, plus another $750 million when it sells new shares. Northwest creditors have bought $50 million of the $750 million in new shares. The rest will be bought by its underwriting group, which is led by JP Morgan Securities Inc.
It has projected 2007 revenue of $12.77 billion and profit of $794 million.