Executives of Northwest Airlines Corp., the nation’s fourth-largest airline, spelled out for creditors on Friday their plans for bringing the company out of bankruptcy, including cost savings of up to $2.5 billion, labor cuts and plans to open a subsidiary that would fly smaller planes.
“Our focus is to restructure our business,” said Douglas M. Steenland, president and chief executive officer of Northwest.
The airline company is counting on the cost savings to help it achieve at least a BB bond rating by the time it emerges from bankruptcy to make it easier to raise funds. “You need to be in a position to raise capital,” Steenland told The Associated Press after meeting with creditors in a midtown Manhattan hotel.
Northwest has a D rating now, meaning that it is in default on its debt. Credit ratings are important for a business because they determine its borrowing costs.
“A double-B in this environment would be pretty good for an airline,” said Gimme Credit senior credit analyst Evan Mann. He said BB would put Northwest debt just below investment-grade — which isn’t bad considering the airline industry’s woes.
“Unless you have an exceptional balance sheet, it would be very hard for the investment industry to give you investment grade,” he said.
Creditors chosen to be on the nine-member creditors committee included Airbus SA’s North American unit, the International Association of Machinists, Bombardier Inc. and General Electric Co. as well as the Pension Benefit Guaranty Corp.
The creditors committee will represent unsecured creditors.
“The creditors committee in the Northwest case will have an important role in the company’s exit (from bankruptcy),” said Cary Stanford, a managing director at Duff & Phelps LLC, a corporate financial advisory and investment banking firm.
Stanford added: “This is a case that will undoubtedly require a new investment of capital to achieve that BB rating. There are specific financial metrics that the rating (agency) community looks at. Cash is, perhaps, one of the most important metrics in rating an airline.”
Northwest, headquartered in Eagan, Minn., filed for bankruptcy protection on Sept. 14. In recent days, it has been seeking $1.4 billion in a fresh round of concessions from its workers, but on-again, off-again talks have yielded only a preliminary deal with pilots and a strike by mechanics.
In its Friday presentation to creditors, Northwest said, it is considering opening a subsidiary which would operate smaller aircraft with 70 to 100 seats. That could be an attempt to get around its contract with pilots, which requires all flights of 70 or more seats to be flown by mainline captains rather than lower-paid regional pilots.
Air Line Pilots Association spokesman Will Holman said the union believes flying by a subsidiary would also fall under its contract.
The pilots union would consider a lower pay scale for flying those smaller jets, but would oppose shifting those flights away from Northwest pilots, said Northwest ALPA head Mark McClain on Thursday.
Like many other airlines, the carrier has been hit by the high cost of fuel and increased competition from low-cost carriers. “We have the highest unit labor costs in the industry,” said Neal Cohen, Northwest’s executive vice president and chief financial officer.
Addressing creditors, Steenland said he is committed to achieving long-term profitability and that this would be attained by cutting labor and non-labor costs.
Cohen told creditors that the recent sharp rise in fuel prices accelerated the need for change at Northwest. He also told the creditors more labor cost cuts are required. “Much work needs to be done in this area,” he said.