Northwest Airlines (NWA)

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Northwest’s restructuring goals during bankruptcy included annual cost reductions of $2.4 billion. Through collective bargaining with employee labor unions, Northwest management negotiated approximately $1.4 billion in annual labor cost savings. Northwest achieved non-labor savings through restructured agreements with its regional airline affiliates, optimization of interest and insurance contracts, lower fuel burn, and reduction in facilities costs. The airline has also reduced its fleet by 9.2%, which has resulted in fewer available seat miles (ASM)^[4].

While cost cutting made the company profitable in 2006, there are a multitude of risk factors working against the airline. The most prominent among these is the price of oil. Crude oil prices climbed 55% from 2004-2006^[5]. Northwest's fuel costs have risen in tandem, with the average price of fuel per gallon rising from $1.1817 to $2.0247 during the same period. Despite industry-wide fears for long term viability, CEO Doug Steenland claimed that his company can maintain profitability even if oil stays at $100 a barrel on 1 October 2008.^[6]Management also fears union demands for wage increases, given that employees were forced to accept salary cuts during bankruptcy ^[7] .

[edit] Business Financials

The Northwest fleet of 371 aircraft provides service to 240 destinations across three continents^[8]. The airline utilizes domestic hubs in Detroit, Minneapolis/St. Paul and Memphis, and international hubs in Amsterdam and Tokyo. The Amsterdam hub is operated through a joint venture with KLM Royal Dutch Airlines^[9].

Northwest’s operating revenue has increased yearly from 2003 until 2006. However, while the trend continues to be positive, the magnitude of the year on year percentage increase has fallen over time. From 2003 to 2004, operating revenues climbed by nearly 12%, as a result of an over 25% gain in regional carrier revenue and a nearly 10.5% increase in mainline passenger revenue; in contrast, operating revenue increased by only 2.3% from 2005 to 2006, due to a significant slowing in both regional carrier and mainline passenger revenue growth^[10]. Total revenue passenger numbers were actually lower in 2006 than in both 2004 and 2005; 2006 operating revenue growth remained slightly positive only as a result of higher average fares^[11].

The airline’s operating income numbers were quite poor for the years 2003-2005. The decrease in income observed from 2003 to 2004 was motivated by a nearly 14% increase in costs that outpaced revenue growth. These higher costs were led by a more than doubling in the price of both aircraft fuel and regional carrier expenses, as well as a 78% increase in aircraft maintenance costs. Operating expenses continued to expand into 2005, due to an additional 30% increase in regional carrier expenses and a 42% rise in wage and benefit costs. By 2006, bankruptcy protection allowed Northwest to cut expenses across the board, which combined provided a nearly 10.5% decrease in operating costs, allowing for profitability in 2006^[12].

Northwest 2006 10K^[13]

Northwest 2006 10K^[14]

Northwest 2006 10K^[15]

Operational terminology unique to the airline industry includes available seat miles (ASM), revenue per available seat mile (RASM) and cost per available seat mile (CASM). The three metrics are determined as follows:

[edit] Key Trends and Forces

• NWA better hedged against Rising Fuel Costs than competitors: Fuel expenses represent one of the largest single costs faced by airliners. From 2004 until 2006, fuel costs have climbed from 18.7% to 28.6% of Northwest’s operating expenses^[16]. The airline occasionally employs hedging strategies to reduce the impact of changing fuel prices. This proved beneficial in 2005, when Northwest saved $20.9 million in fuel costs as a result of its derivative contracts. However, there are risks associated with hedging, as evidenced in 2006, when the hedges lost $39.3 million due to poor bets on price movements^[17]. As of January 31, 2007, Northwest had hedged 40% of its anticipated fuel expenses^[18].

• NWA and competitors under pressure to improve timeliness: Public outcry against airline delays has led to demand for a government response. In November 2007, President Bush voiced support for higher penalties for airlines that severely delay passengers ^[19]. Even more troubling for Northwest are suggestions that the government might limit the number of landing slots at busy airports around the country. While Northwest's hubs will not be impacted at this time, management has expressed concern that regulations could intensify as the air traffic control system becomes further strained^[20].

• Wage costs remain potentially volatile: Salary and benefits expense represent the second largest operating cost for Northwest. During bankruptcy, the airline managed to decrease wage costs by nearly 30%, which significantly aided the carrier’s return to profitability^[21]. Management is concerned that employees who took pay cuts during bankruptcy will demand compensation now that the company is profitable. Approximately 85% of Northwest employees are represented by labor unions, which is one of the highest participation rates among legacy carriers^[22]. The collective bargaining power of these organizations has been demonstrated in the past, with Northwest flight attendants and support staff gaining concessions from the airline^[23].

• Unhedged exposure to the yen: Nearly a third of Northwest’s operations are conducted in destinations abroad^[24]. As a result, significant portions of operating revenues and costs are denominated in foreign currency. The airline has previously utilized derivatives to hedge against major price movements in these currencies, particularly the Japanese Yen. As of the beginning of 2007, Northwest had no forward contracts for the yen, which has proved beneficial, given the slide of the U.S. dollar and the fact that the airline’s foreign currency sales exceed foreign currency expenditures. However, this might not always be the case, and the company could eventually fall on the losing side of a currency hedge^[25].

• Customer sentiment adversely impacted by international turmoil: With 33% of Northwest’s flights departing for international destinations, much of the company’s revenue is dependent on its passengers’ willingness to travel abroad^[26]. The historical record suggests that passenger demand is quite responsive to changes in the worldwide geopolitical situation; airline passenger loads decreased considerably during both the SARS epidemic and the August 2006 terrorist threats against transatlantic aircraft^[27]. With the continued turmoil in the Middle East and the potential of terrorist activity, it is possible that a serious security threat could once again reduce demand for international travel.

[edit] Competitors

Northwest's closest competitors include the following:

RASM and CASM respectively allow for comparisons across airlines for unit revenue and unit costs. In the battle between low fare carriers and legacy airlines, companies like Southwest and Jetblue have found ways to reduce CASM (through lower maintenance costs from a more uniform aircraft fleet type and a “no frills” customer experience) while legacy airlines continue with their historically higher CASM operating strategy. Thus, even if both types of carriers manage to fill seats and achieve similar RASM, the low fare airlines will achieve greater profitability from their lower cost structure.

 Northwest Airlines

	Select All  |  Select None Metrics Yield per Revenue Passenger Mile Load Factor Fleet Size Revenue Passenger Miles Average Passenger Fare Gallons of Fuel Used Salaries, Wages & Benefits per Available Seat Mile Fuel Expense per Available Seat Mile Fuel Cost Operating Income Passenger Revenue Freight Revenue Cost per Available Seat Mile Revenue per Available Seat Mile Fuel Cost per Gallon Net Income Cancel

	Select All  |  Select None Companies Air France ADS (AKH) Aircastle (AYR) Allegiant Travel Company (ALGT) China Eastern Airlines (CEA) China Southern Airlines Company (ZNH) American Airlines (AMR) Continental Airlines (CAL) Delta Air Lines Inc. (DAL) EXPRESSJET HOLDINGS (XJT) Frontier Airlines Holdings (FRNT) Gol Linhas Aereas Inteligentes S.A. (GOL) Hawaiian Airlines (HA) JetBlue Airways (JBLU) Lan Chile S.A. (LFL) MAIR Holdings (MAIR) Midwest Air Group (MEH) Mesa Air Group (MESA) Northwest Airlines (NWA) Pinnacle Airlines (PNCL) Republic Airways Holdings (RJET) Ryanair Holdings (RYAAY) SkyWest (SKYW) Southwest Airlines Company (LUV) US Airways Group (LCC) United Airlines (UAUA) Air France-KLM (AFLYY) AirTran Holdings (AAI) Alaska Air Group (ALK) Copa Holdings, S.A. (CPA) TAM S.A. (TAM) Cancel

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Company	Data From	Fuel Cost per Gallon	Cost per Available Seat Mile	Revenue per Available Seat Mile	Net Income	Passenger Revenue	Freight Revenue
American Airlines (AMR)	2007	$2.12[39]	$0.114[39]	$0.107[39]	$504M[40]	$20.7B[40]	$8.25B[40]
Continental Airlines (CAL)	2007	$2.18[41]	$0.108[41]	$0.112[41]	$459M[41]	$13B[42]	$453M[42]
Delta Air Lines Inc. (DAL)	2007	$2.24[43]	$0.119[43]	$0.112[43]	$1.61B	$16.9B[44]	$482M[44]
Northwest Airlines (NWA)	2007	$2.05[45]	$0.108[45]	$0.116[45]	$2.09B[46]	$9.43B[46]	$840M[46]
United Airlines (UAUA)	2007	$2.18[47]	$0.139[47]	$0.12[47]	$693M[48]	$18.3B[48]	$770M[48]

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[edit] Market Share

Northwest is the sixth largest airline in the United States, capturing approximately 7% of the domestic commercial airline market. The top fifteen U.S. airlines by market share are ranked below, where market share is measured in terms of domestic revenue passenger miles.

[edit] Notes

1. ↑ U.S. Department of Transportation, Bureau of Transportation Statistics
2. ↑ Northwest 2006 10K, Item 1, pg. 7-8
3. ↑ Northwest 2006 10K, Item 1, pg. 2
4. ↑ Northwest 2006 10K, Item 1, pg. 3-5
5. ↑ InflationData.com
6. ↑ Marketwatch
7. ↑ Northwest 2006 10K, Item 1, pg. 3
8. ↑ Northwest 2006 10K, Item 2, pg. 17
9. ↑ Northwest 2006 10K, Item 1, pg. 6-7
10. ↑ Northwest 2006 10K, Item 8, pg. 45
11. ↑ Northwest 2006 10K, Item 6, pg. 24
12. ↑ Northwest 2006 10K, Item 8, pg. 45
13. ↑ Northwest 2006 10K, Item 6, pg. 23
14. ↑ Northwest 2006 10K, Note 19, pg. 78
15. ↑ Continental 2006 10K, Item 6, pg. 30
16. ↑ Northwest 2006 10K, Item 8, pg. 45
17. ↑ Northwest 2006 10K, Item 7, page 29
18. ↑ Northwest 2006 10K, Item 1A, page 14
19. ↑ The Washington Post, “Bush Frees up Military Airspace for Thanksgiving”, November 15, 2007
20. ↑ Northwest 2006 10K, Item 1, pg. 11
21. ↑ Northwest 2006 10K, Item 8, pg. 45
22. ↑ Northwest 2006 10K Item 1A, pg. 13
23. ↑ Northwest 2006 10K, Item 1, pg.3
24. ↑ Northwest 2006 10K, Item 1, pg. 7
25. ↑ Northwest 2006 10K, Item 1A, pg. 15
26. ↑ Northwest 2006 10K, Item 1, Pg. 7
27. ↑ Northwest 2006 10K, Item 1, pg. 4 and Item 1A, pg. 13
28. ↑ Northwest 2006 10K, Item 6, pg. 24
29. ↑ AirTran 2006 10K, Item 6, pg. 22
30. ↑ Alaska Air Group 2006 10K, Item 6, pg. 27
31. ↑ American Airlines 2006 10K, Item 7, pg. 40
32. ↑ Continental 2006 10K, Item 6, pg. 29
33. ↑ Delta 2006 10K, Item 6, pg. 19
34. ↑ Frontier 2006 10K, Item 6, pg. 30
35. ↑ JetBlue 2006 10K, Item 6, pg. 26
36. ↑ Southwest 2006 10K, Item 6, pg. 15
37. ↑ United 2006 10K, Item 6, pg. 32
38. ↑ US Airways 2006 10K, Item 7, pg. 44
39. ↑ ^{39.0 39.1 39.2} AMR 2007 10-K, Item 7, pg na
40. ↑ ^{40.0 40.1 40.2} AMR 2007 10-K, Item 8, pg na
41. ↑ ^{41.0 41.1 41.2 41.3} CAL 2007 10-K, Item 6, pg _
42. ↑ ^{42.0 42.1} CAL 2007 10-K, Item 7, pg _
43. ↑ ^{43.0 43.1 43.2} DAL 2007 10-K, Item 6, pg. 24
44. ↑ ^{44.0 44.1} DAL 2007 10-K, Item 8, pg. F-6
45. ↑ ^{45.0 45.1 45.2} NWA 2007 10-K, Item 6, 23
46. ↑ ^{46.0 46.1 46.2} NWA 2007 10-K, Item 6, 22
47. ↑ ^{47.0 47.1 47.2} UAUA, 2007 10-K, Item-6, pg-30
48. ↑ ^{48.0 48.1 48.2} UAUA, 2007 10-K, Item-8, pg-74
49. ↑ Reutersretrieved July 7, 2008.