With losses piling up and a looming change in bankruptcy law, Northwest Airlines is trying to beat the clock in its efforts to cut labor costs and pull out of its financial tailspin.
That’s why the dogfight between Northwest Airlines and its mechanics union has drawn a big crowd: From airline workers and executives at other carriers to airline investors and passengers. In one corner: Northwest management, which has vowed to keep flying this weekend despite a walkout by mechanics. On the other, a scrappy union that has so far failed to line up much support from the carrier’s other unions.
Northwest management drew a line in the sand earlier this month when it detailed its plans to keep flying without its union mechanics. On Saturday, some 1,500 replacement workers and managers took over for mechanics who walked off the job. The company was already sending up to 38 percent of mechanic’s work to outside vendors.
Northwest also said it can field another 1,500 flight attendants if there's a sympathy strike by cabin crews. Those replacements will include managers, replacement flight attendants and laid-off flight attendants who recently have been recalled.
The company's plan to stay out of bankruptcy court includes savings of $176 million a year by cutting mechanics’ jobs, wages and benefits. That "last, best offer" is part of a larger, $1.1 billion package of cuts from all its workers. If management can keep the airline flying through the walkout by mechanics, it holds a much stronger hand in negotiations with its other labor unions.
But it will have to move quickly: Northwest's losses widened to $225 million in the in the latest quarter and the carrier is getting crushed by the relentless rise in jet-fuel prices. Though the company has a sizeable cash hoard of over $2 billion, it’s burning through it to make up for continued operating losses.
Northwest management is also working to refinance a crushing debt load, and is lobbying hard in Congress for help offloading some of its heavy pension obligations. Under the current law, it would need to contribute $800 million to its pension in 2006 and $1.7 billion in 2007. The company spent $976,000 in lobbying expenses in the first six months of 2005, which included its push for changes in pension law.
If it can’t win quick concessions and restructure its debt and pensions, Northwest management is under the gun to file for bankruptcy sooner rather than later. That's because an upcoming change in bankruptcy law, which will apply to filings made after Oct. 17, will make it harder to pay bonuses to keep managers at the company and will impose tighter deadlines on filers to either exit bankruptcy or liquidate faster.
A bankruptcy filing for Northwest wouldn’t be cheap. United Airlines reported spending $1.4 billion on it reorganization during its second quarter alone, including $602 million to unloading its pensions on a federal insurer.
Labor fault lines
The battle at Northwest is also exposing deep fault lines running through its labor unions. Once part of the International Association of Machinists and Aerospace Workers, Northwest’s mechanics voted to leave the union and join the Aircraft Mechanics Fraternal Association in 1998. Northwest’s IAMA local, which represents Northwest ground crews, is not backing the mechanics strike.
During last week's face-off between management and mechanics, pilots stayed on the sidelines, refusing to say whether or not they’d cross picket lines. Flight attendants joined in a local rally, but held off deciding whether to strike until the mechanics' deadline had come and gone. When the mechanics walked, neither the pilots nor the flight attendants joined them.
The mechanics have also failed to win the support of the White House, which intervened in 2001 to head off a Northwest mechanics’ strike by appointing a presidential emergency board. This time around, a White House spokesman said this week, a strike “would not present a substantial disruption of interstate commerce."
Wall Street seems to like management’s take-no-prisoners strategy. Northwest’s stock began last week at $4 a share, but jumped by more than a third after some analysts advised clients that management seemed to have the upper hand. Those investors are betting that if management can keep the airline flying with replacement mechanics, it can move quickly to win wider concessions from its workforce.
Northwest’s strategy, of course, will work only if it succeeds in keeping operations running smoothly. Heavy flight delays or cancellations could hurt future bookings, accelerating the airline’s financial tailspin.
The company says bookings are running at about normal levels for this time of year, but some travel agents reported last week that more customers were making alternate plans as the strike date approaches.
"We are definitely seeing people choose other airlines, even if it means a connecting flight or a little extra cost," said Ann Gray, owner of Interlachen Travel in Edina, Minn.