A leading industry expert has suggested that Northwest
Airlines must address the new economic realities or face an uncertain future.Daniel M. Kasper, managing director of LECG, LLC and head
of the firm’s transportation practice says that the
economics of the U.S. airline industry have changed dramatically andNWA must adapt.

Kasper’s remarks were prepared for presentation at a hearing in U.S. Bankruptcy Court for the Southern District of New York today regarding Northwest’s motions, filed under Sections 1113(c) and 1114 of the Bankruptcy Code, asking the court to reject the company’s collective bargaining agreements with the Air Line Pilots Association (ALPA)
and the Professional Flight Attendants Association (PFAA).Ê Also today, the hearing
begins on the company’s motion under Section 1114 to modify its retiree employee
benefits.Ê

The International Association of Machinist and Aerospace Workers (IAM), which represents Northwest’s ground employees, has agreed to present the company’s contract settlement proposal to its members for ratification. As a result of this agreement, IAM and Northwest will ask the bankruptcy court judge to postpone IAM’s portion of the 1113(c) proceedings.

“The past four years have been the worst period in commercial aviation history,
particularly for the legacy network carriers.Ê
During this period, the legacy network carriers have suffered record
financial losses, lost market share and have been forced to furlough thousands
of employees.Ê Likewise, during this
period, four of the country’s legacy carriers—United, US Airways (twice),
Delta and Northwest—which collectively account for just under half of U.S.
domestic mainline capacity, have all filed for Chapter 11 bankruptcy
protection, while the remaining legacy carriers (American and Continental) have
significantly restructured their labor and other costs outside of
bankruptcy,” Kasper said.

Ê“The financial problems experienced by
Northwest and other legacy network carriers during the past several years
resulted from a number of factors.Ê Chief
among them has been a series of major changes in the U.S. airline industry that
undermined legacy carriers’ ability to charge prices sufficient to cover their
costs and depressed the demand for commercial air service.”

p>“These and other factors have caused
industry-wide airline ticket prices to fall sharply during the past several
years.Ê Because low-cost carriers (LCCs)
now set pricing in markets accounting for the vast majority of domestic origin
and destination passengers, and because this is a trend
that is almost certain to continue, Northwest has little choice but to reduce
its costs to levels that will enable it to effectively compete against
LCCs,” Kasper said.

Ê“To
survive in the face of reduced demand, depressed yields and increased
competition from LCCs, all legacy carriers have found it necessary to make
significant cost reductions.Ê Northwest
has made aggressive efforts to cut its costs, but it
has not yet been able to reach agreement with all of its unions and retirees to
secure the labor cost savings necessary to restore Northwest’s competitive
viability.”

ÊÊÊ Kasper added that, “At the heart of
Northwest’s uncompetitive cost structure are labor costs that are now the
highest in the industry. Total compensation per Northwest employee is more than
66 percent higher than LCC average employee compensation.”Ê

He continued, “Average compensation at
carriers such as United and US Airways has fallen dramatically since 2002,
while average compensation per employee at Northwest has actually increased.”

Discussing Northwest’s current financial
position, Kasper said, “The overall effect of Northwest’s deteriorating
competitive position—both vis-a-vis the LCCs and other legacy carriers—
has been a long string of large net and operating losses.Ê Northwest’s pre-tax
losses between 2001 and
the third quarter of 2005 have totaled approximately $3.8 billion.Ê Faced with
dwindling cash reserves and unable
to obtain sufficient labor cost relief as it entered the traditionally weak
fall and winter seasons, Northwest was forced to seek Chapter 11 bankruptcy
protection.”

ÊÊÊ “Notwithstanding its portfolio of
valuable assets, Northwest’s cost structure generally—and its labor cost
structure in particular—are unsustainable in today’s economic and
competitive environment.Ê Unless
Northwest can quickly and substantially lower its labor costs, Northwest’s
financial position will continue to deteriorate.”

ÊÊÊ “Northwest’s unit operating costs
(excluding fuel and stage-length adjusted) were second highest in the industry
during the third quarter of 2005 and 61 percent above the average of the
LCCs.Ê Including interest payments,
Northwest’s stage-length adjusted unit costs are the highest in the industry and 67
percent above
the LCC average,” Kasper said.

ÊÊÊ He continued, “Northwest’s unit labor
costs are far and away the highest in the industry.Ê Northwest’s unit labor costs are
significantly higher than those of the other restructured legacy carriers and
71 percent higher than the LCC average.”

ÊÊÊ Kasper added that, “Restrictive work rules limit the productivity of
Northwest’s workforce.”
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