Chris

Jan 5, 2006

Northwest Continues Its Push To Create Regional Subsidiary

By SUSAN CAREY
Copyright 2006 Wall Street Journal

Northwest Airlines, facing mounting pilot opposition to its plan to create a separate subsidiary that would operate large regional jets, said the new company would allow it to expand service to its midsized markets, participate in a fast-growing sector of the industry and offer employment to as many as 800 furloughed Northwest pilots by 2010.

The carrier, which plans to defend the move in communications with employees today, hopes to counter some of the negative speculation that the venture has provoked among its employees. Northwest is also seeking less costly contracts with its three big unions or it will ask the bankruptcy court overseeing its case to set them aside and impose its own terms. The carrier could be seriously hurt if its cost-cutting efforts provoke a strike, especially from its pilots union.

Neal Cohen, Northwest's chief financial officer, said the unit could operate 105 regional jets of 70 to 100 seats by 2010, with the bulk of the flying being new activity not currently available to Northwest pilots. That would create opportunities for Northwest's furloughed pilots. The carrier already has more than 700 pilots on layoff and is planning to trim more cockpit jobs as it shrinks its mainline operation and introduces more-productive work rules.

Mr. Cohen rejected claims by the Air Line Pilots Association that the planned venture would lead to the outsourcing of 1,000 to 1,500 Northwest pilot jobs. "This is an attempt to create a better outcome" by keeping the jobs under Northwest's corporate umbrella, he said.

Northwest, which filed for bankruptcy-court protection in September, is seeking to lower its overall labor costs by $1.4 billion and has asked the U.S. Bankruptcy Court judge hearing its case to annul the current labor agreements with its three largest unions if they don't agree to new terms. A trial on the issue is set to begin Jan. 17.

Part of Northwest's labor wish list, filed with the court in late September, is the creation of the venture, which would be staffed by pilots and possibly flight attendants who aren't on their current unions' respective seniority lists at Northwest. Under the pilots' current contract, Northwest's regional affiliates, with limited exceptions, can operate only a defined number of 50-seat regional jets, with Northwest's own pilots claiming rights to operate all the larger equipment.

Northwest, the nation's fourth-largest airline by traffic, also is seeking to outsource customer-service and ramp working jobs at nonhub airports and to farm out most flight attendant jobs on international routes to "regional flight attendants" who aren't members of the U.S. union. Northwest already beat a mechanics strike with replacement workers.

These plans, along with huge pay and benefits cuts sought, have inflamed the carrier's employees. The pilots union has been the most vocal. The union said if Northwest persists with its demands and the judge allows the carrier to impose new employment terms on the group, the pilots will strike, which could lead to Northwest's liquidation.

"All the elements of a train wreck are here," said Capt. Mark McClain, chairman of the union branch representing Northwest's 5,000 pilots. "The path they're on is not the best path to ensure the viability of Northwest."

He said ALPA recently gave Northwest a proposal for keeping the new planes inhouse but flying them with Northwest pilots on pay, benefits and work rules that are competitive with other regional carriers, which would represent an economic comedown for those pilots. But Capt. McClain said Northwest hasn't responded.

Northwest said it reviewed the proposal and rejected it. Mr. Cohen said the carrier is focused on helping the pilots understand the benefits of the plan. "Their concerns can be addressed in negotiations," he added.

Northwest also needs to prepare for the phased retirement of its vast fleet of 30-year old DC-9 aircraft, which now perform some of the flights the carrier wants to do more efficiently with the new planes.

The subsidiary, which could start operations in 2007, after it wins its own operating permits from the government, also may have better access to regional aircraft financing than Northwest itself, Mr. Cohen said.

The venture would need to raise about $2 billion to pay for the first 105 aircraft. Northwest needs to concentrate on raising more than $3 billion to fund its deliveries of widebody aircraft on order to upgrade its international fleet, he said. Northwest is looking at various large regional jets now produced by Bombardier Inc. and Empresa Brasileira de Aeronautica, but Mr. Cohen said it isn't near a decision.