Northwest Airlines get back to competitive market

Northwest Airlines got approval to emerge from bankruptcy, that frees it to move out of court protection from its creditors and into an industry besieged by higher fuel costs and crowded with competitors.

Photo: Northwest Airlines get back to competitive market

Eagan, Minnesota-based Northwest Airlines Corp., the fifth-largest U.S. airline, has spent more than 20 months cutting costs and slashing jobs in its reorganization effort and said it expects to emerge from bankruptcy on May 31.

More than 97 percent of creditors eligible to vote on the company's reorganization plan have approved it.

Under the plan approved Friday by Judge Allan Gropper after a two-day hearing, 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 again on the New York Stock Exchange under the symbol "NWA."

"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 (220 million EUR).

The plan gives Northwest Chief Executive Doug Steenland $26.6 million (19.7 million EUR) in stock and options once the company emerges. It also gives the outgoing chairman, Gary Wilson, $2 million (1.5 million EUR) as well as medical and dental insurance for life and up to $75,000 (55,650 EUR) 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 union objectors who argued that the equity award plan unfairly enriched executives and had been created with improper interference by senior executives.

The airline overcame a major obstacle when it settled with a group of shareholders earlier this week. An ad hoc committee of equity holders said Monday that in return for dropping its opposition to the restructuring plan, Northwest would pay up to $5 million (3.7 million EUR) in fees and expenses incurred by the committee, which had been agitating for some return on its investment. Its main accusation was that Northwest had been underestimating its value as a reorganized company.

Northwest expects to be worth roughly $7 billion (5.2 billion EUR) when it emerges, plus another $750 million (556.5 million EUR) when it sells new shares. Northwest creditors have bought $50 million (37 million EUR) of the $750 million (556.5 million EUR) in new shares. The rest will be bought by its underwriting group, which is led by JP Morgan Securities Inc.

Through its reorganization, Northwest has reduced operating costs by $2.4 billion (1.78 billion EUR) a year, with $1.4 billion (1.04 billion EUR) coming from labor cuts. It also has brought down debt and lease expenses by $4.2 billion (3.12 billion EUR) a year and shrunk its business, reducing available flying capacity by 10 percent over one year's time.

It has projected 2007 revenue of $12.77 billion (9.48 billion EUR) and profit of $794 million (589 million EUR).