slowplay

Northwest Airlines Announces Revenue Enhancements and Capacity Reductions in Response to Extraordinary Fuel Costs
Thursday, April 03, 2008; Posted: 03:42 PM

NWA today announced several actions that are in response to the high cost of fuel and current economic uncertainties.

In announcing the measures, Northwest Airlines President and CEO Doug Steenland said, "Over the past several months, the price of oil has risen dramatically to all time highs and there is no reasonable basis to conclude that oil prices will materially decline anytime soon. These increased costs are significant and call for a strong response from us."

Steenland added, "Today we are summarizing our current plan to mitigate these fuel cost increases. This plan includes revenue enhancements, capacity and fleet reductions, as well as reductions in capital and operating expenses. Let me emphasize that, while we need to reduce costs in this difficult environment, we will not be going back to our employees for pay cuts."

I. REVENUE ENHANCEMENTS

Fuel Surcharges and Fare Increases

Faced with these financial challenges, regrettably, Northwest Airlines must pass through these extraordinary fuel cost increases to its customers through fare increases and fuel surcharges.

On March 18, 2008, for international routes, Northwest increased one-way fuel surcharges from North America to Europe, India, Japan and most other destinations in Asia ranging from $115 to $155. Fuel surcharges on flights from Japan to North America are now approximately $140 one-way but will increase to $160 one-way for ticketing starting May 1, 2008.

For domestic routes, since Jan. 1, 2008 Northwest has participated in 11 attempts by various carriers to increase fares to reflect rising fuel costs, although most have been rolled back because some airlines failed to match.

Domestic Luggage Fee Increases

Also in response to record fuel costs, on March 29, 2008, Northwest matched other U.S. network carriers and for North American travel implemented a $25 charge, each way, for the customer's second checked bag and $100 each for three or more checked bags. The fee for bags greater than 50 pounds has also been raised from $25 to $50 each way.

The new policy takes effect on May 5, 2008, and is expected to generate approximately $25 million in added revenue for 2008. For 2009, the policies are expected to add between $40 and $70 million in revenue on an annual basis.

The airlines' full fare customers, WorldPerks elite customers and U.S. military remain exempt from the new luggage policies.

II. CAPACITY REDUCTIONS

Schedule Reductions

In September, after peak summer travel concludes, Northwest will reduce its scheduled domestic system capacity by approximately five percent versus the 2008 business plan. Full-year domestic available seat miles (ASMs) are expected to be flat to down slightly versus 2007.

Northwest is continuing to expand its international service with the addition of new flights between Detroit and London Heathrow; Minneapolis/St. Paul and London Heathrow; Seattle and London Heathrow; Minneapolis/St. Paul and Paris; Portland, Ore. and Amsterdam; and Dallas/Ft. Worth and Amsterdam, which will be operated by Northwest's joint venture partner, KLM Royal Dutch Airlines. Northwest will review whether any changes to the international schedule are needed after the peak summer travel season.

Fleet Reductions

As a result of the five percent domestic capacity reduction from planned levels, Northwest will remove an additional 15 to 20 aircraft from service. Two DC-9s will be removed in June and the remainder in the fall to coincide with the planned schedule reductions. These fleet reductions will include approximately 10 DC-9s and the balance being a mix of Boeing 757s and Airbus A320s and A319s.

III. LIQUIDITY ENHANCEMENTS

Northwest Airlines currently has the strongest liquidity position among U.S. network carriers and is committed to maintaining its industry-leading cash position. As of Dec. 31, 2007, Northwest's unrestricted cash on hand was $3 billion which equaled 24 percent of revenues for the full year.

"Challenging economic times require smart, but difficult, decisions by the management team," said Steenland. "We are pro-actively making those decisions now to maximize our liquidity position."

Capital Expenditures

Northwest is reducing non-aircraft capital expenditures for 2008 by approximately $100 million. The airline now intends to invest approximately $150 million in non-aircraft capital expenditures in 2008.

Improved Profit and Loss Statement

The airline will also seek to realize profit improvements of $100 million on an annual basis through cost reductions, productivity improvements and revenue enhancements. To the extent that the schedule changes will result in the need for fewer employees, every effort will be made to achieve these reductions through attrition.

With the reduced flying, Northwest has suspended its plans to hire additional pilots and flight attendants. The last training classes for both groups conclude in June.

Northwest Airlines is one of the world's largest airlines with hubs at Detroit, Minneapolis/St. Paul, Memphis, Tokyo and Amsterdam, and approximately 1,400 daily departures. Northwest is a member of SkyTeam, an airline alliance that offers customers one of the world's most extensive global networks. Northwest and its travel partners serve more than 1,000 cities in excess of 160 countries on six continents.

SOURCE: Northwest Airlines

slowplay

Looks remarkably similar to DAL's announcement, but out of a smaller fleet with no growth aircraft backfilling.


Ruh Roh. What a crap week for our industry. Aloha, Champion, ATA all down. Now we're probably going to see an ugly shotgun wedding between DAL/NWA.

Ain't life grand as an airline pilot?

Superpilot92

NWA and DAL are and have been playing out of the same playbook for a while. This is all an orchestrated dance to align everything prior to doing the deed. I am going to grab some popcorn and a beer anyone need anything while i am up?

TBoneF15

I'm gonna need something a little stronger. Got any whiskey?

acl65pilot

Exactly. This is something that probably had to be done to satisfy ALPA. Now we are evening the playing field. There may be more 9 cuts in the future, and I am sure that both sides know about that as well. It will all be agreed to in the joint PWA.

The board should wrap up their meeting tomorrow. Look for something one way or another in the next few weeks.
Out manager were in a two day meeting at HQ today and tomorrow. Lots is going on and the lid is shut tighter than a submarine hatch this time. That is a good thing. Progress may happen.

Bucking Bar

What do you mean no growth aircraft backfilling? NWA has 72 large RJ's coming and Delta has at least another 19 getting built. They are backfilling, they just are not using you and me to fly the jets.
Next year, they will have at least 36 jets. 100% growth isn't shabby for them.

WE MUST FIX SCOPE WHILE OUR REPS ARE AT THE TABLE

capncrunch

The reality is that we are in a recession backed by high oil which requires us to cinch our belt and weather the storm. If we shrink a little right now to survive, that makes sense. What would be bad is if we were shrinking during growing times. Ultimately, last one on the field wins. I hope we all survive.

hiflyer

That's right cap. Unfortunately the "cinching of the belt" will be done between DAL and NWA to get this merger done. I read an article that explained one of the driving forces to get this merger done is access to the capital markets. With and improved rating on the combined airline, the access to needed liquidity will be more available.

The name of the game is survival. Who can ride out the storm the longest and be standing to monopolize the markets. The NWA/DAL deal is good as done, notwithstanding the governments intervention in stopping it due to job losses.

The only problem is too many promises were made by RA and will be broken. I expect more layoffs/ offers to leave after the merger. This deal is getting done, count on it. Air France wants it and is willing to pay money to see it happen. Right there is access to cash to weather the storm. If things are rough after the merger, and access to the markets for credit is tight, Air France will be entrenched and will provide the needed capital to sustain the downturn until the merged company can get its act together.

After the second part of the Open Skies agreement is finalized, Air France will buy into even a larger portion of DAL and may end up owning controlling interest. Thats just a guess, but probably not too far-out of one nonetheless.

The way I see this, DAL/NWA....CAL/UAL and then AA pushing for AA/BA. The industry will be in the toilet and foreign money will be needed for survival. Government will agree to some sort of subsidies that will ease the fear for continued investment by foreign money.

If the above does not happen, someone is going down and the fire sale of the remains will fit nicely into SWA's need for a turn-key int'l operation.

So that being said, I see SWA waiting in the wings for their big push to go international.

sailingfun

I don't think SWA has any desire to go international other then Central and some South America. There business model just does not support that type of operation. No quick turns and all the hassles plus costs of flying international. With their employee costs they would have a tough time competing. Having your aircraft tied up for hours awaiting customs clearances is not something they would tolerate well let alone positive bag match and the extra personal required to staff rechecking baggage and other issues in customs..

hiflyer

I tend to agree with all that you say, however; the industry is entering a new paradigm. SWA's model was the standard for an airline to be successful in a domestic market. The problem is the downward pressure in the US from a global perspective. The US is no longer "the" cash cow of the free market. Many economies are emerging where the masses have money to spend on vacations abroad. Hence the weak dollar and the in-flux of vacationers to the US.

If SWA wants to relieve itself from the burdens of the boom and bust cycle of the US economy, they have to stretch their markets. This is why I believe they will need more than a S. AM and Mexico solution. Even those two destinations would require an overhaul of their reservation system and seating policy. The manifest requirements would obviously be one reason.

So, a turn-key international operation, (767's 777's on the cheap) would fit the bill. One example!!! Lets say a large carrier in a major market goes belly-up and has to file for BK. No capital to be found and the new unfriendly BK laws necessitate a liquidation of assets. Well, SWA would be a good bet for this scenario. I'm sure other airlines could take advantage too.

But I see this as a possibility. If not, I believe SWA is in for a rough ride due to their domestic exposure and weak dollar. DAL for example gets a portion of their revenue paid in Euros. It will only get better as the joint (anti-trust) venture with Air France matures. See where this is going?