Northwest Airlines Corp., which filed for bankruptcy in September, is predicting a pretax loss of $1.7 billion for the year due to high fuel and labor costs which the carrier has not been able to readily pass on to ticket buyers.
Meanwhile, a New York bankruptcy judge allowed Northwest to return 108 planes to companies that had been leasing the equipment to the airline.
The estimate of the expected loss for the year is “additional confirmation as to why Northwest filed for Chapter 11,” said Joel Denney, an airline analyst for Piper Jaffray & Co.
Neal Cohen, Northwest’s chief financial officer, made the projection Tuesday in New York City to the airline’s bankers. A copy of the slides that accompanied the presentation was available on the airline’s Web site on Wednesday. The airline will announce its third-quarter results next week.
Northwest’s cash balance dropped from $2.46 billion at the end of 2004 to $1.5 billion on Sept. 14, when the airline filed for bankruptcy protection.
Northwest’s pretax losses were $3.6 billion from 2001 through the first half of 2005, excluding unusual items. The $1.7 billion projected loss for all of 2005 is more than double last year’s pretax loss of $696 million and nearly three times a 2003 loss of $583 million.
In July, Northwest Chief Executive Doug Steenland reported the airline had a second-quarter net loss of $225 million, which he characterized as “clearly unacceptable.”
Normally, the third quarter is an airline’s best because of heavy summer travel, but high fuel prices have hurt most carriers.
“A big driver (of higher costs) is fuel and their labor costs are higher than at any other airline,” said Ray Neidl, airline analyst for Calyon Securities. He added that the carrier won’t be able to raise ticket prices enough to cover the higher energy costs.
In the second quarter, Northwest paid $1.64 per gallon for fuel, 52 percent more than it paid a year earlier. In July, Northwest estimated that it would pay $1.70 to $1.80 per gallon in the third quarter — and that was before hurricanes Katrina and Rita.
In its presentation to bankers on Tuesday and at an earlier meeting with creditors, the airline said it is looking to emerge from bankruptcy with a BB credit rating — a sign that the carrier may hedge fuel costs in the future.
Many corporations in other industries — from metals producers to oil companies — use special financial instruments known as hedges to manage costs of raw commodities they produce or rely heavily on.
“The higher rating will encourage counterparties to help set up hedges. Once they are able to do so, they will want to hedge in the future,” said Neidl.
Northwest management is also trying to improve profits by seeking annual labor savings of $1.4 billion.
The airline also said it will reduce the seat miles it flies by 7 to 8 percent in the fourth quarter. The airline’s capacity will be 11 to 13 percent less in the first quarter of 2006.
“They are trying to lower costs as fuel is going in the opposite direction,” Denney said. “There has been too much capacity nationwide, so the airlines can’t raise their prices.”
On approving the return of 108 aircraft, the New York bankruptcy court judge on Wednesday said Northwest Airlines Corp. has to give five days notice to the planes’ owners.
Wednesday’s order affects 108 planes, some of which are in use. The airline has filed a motion which requests approval to surrender another 100 aircraft.
The airline initially asked that it be allowed to offer three days notice of its intention to reject an aircraft’s lease — the surrender of a plane. Companies leasing the craft had asked for notice of 10 days.
According to Calyon Securities’ Neidl, the requests to abandon the aircraft does not mean Northwest will give up over 200 aircraft. “They’ll pick and choose the ones they want. It is part of the renegotiation of leases. Sometimes they look for better prices if the leases are above market rates.”