Northwest Airlines reported a third quarter net loss of $1.2 billion. This compares to a third quarter 2005 net loss of $475 million. Excluding reorganization and unusual items, Northwest reported a third quarter net profit of $252 million versus a third quarter 2005 net loss of $234 million.
The third quarter results include a net loss for the month of September of $337 million. Excluding reorganization items, Northwest reported a September pre-tax loss of $13 million.
Doug Steenland, Northwest Airlines president and chief executive officer, said, “Our third quarter results are a significant improvement over last year’s results and demonstrate further that we are making steady progress in restructuring Northwest Airlines. However, our September loss indicates that we still have work to do in order to reach our goal of sustained profitability.”
The company reiterated its guidance of early October that it expects to report a loss, excluding reorganization items, for the last four months of the year. For full year 2006, based on the airline’s current fuel and revenue estimates, Northwest is forecasting a modest profit with an estimated pre-tax margin of approximately two percent, excluding reorganization items, on more than $12 billion in revenue.
“Our expectation of a modest profit for 2006 is an indication that our restructuring is working. We have been able to stop the losses of the past six years that totaled $4.2 billion, now achieving break even status and even forecasting a modest profit for the year,” Steenland continued.
“While this is an important interim milestone for Northwest, we must continue to implement the remaining actions in our restructuring plan to achieve our goal of sustained profitability.”
Operating revenues in the third quarter increased 0.9 percent versus the third quarter of 2005 to $3.4 billion. System passenger revenue increased 2.9 percent to more than $2.5 billion on 8.0 percent fewer mainline available seat miles (ASMs), resulting in an 11.8 percent improvement in unit revenue. Including regional carrier revenues, Northwest’s consolidated unit revenue improved 12.8 percent on 9.1 percent fewer ASMs.
Operating expenses in the quarter decreased 12.2 percent year-over-year, excluding unusual items, to $3 billion, while mainline unit costs, excluding fuel and unusual items, decreased by 11.8 percent on 7.8 percent fewer ASMs. Salaries, wages and benefits decreased 26.2 percent, primarily due to a combination of labor cost reductions, headcount reductions and the reduced level of flying. Aircraft rental expense decreased 49 percent, primarily due to restructured and rejected aircraft leases.
During the third quarter, fuel averaged $2.18 per gallon, excluding taxes, up 18.0 percent versus the third quarter of last year. Increased fuel prices were partially offset by 9.7 percent fewer gallons consumed primarily because of the company’s capacity reductions.
Northwest’s quarter-ending unrestricted cash and short-term investments balance was approximately $2.1 billion, including net proceeds from the airline’s refinancing of its previous $975 million term loan into a new $1.225 billion debtor-in-possession (DIP)/exit facility that closed in August.
On Aug. 17, Northwest employees attended a White House ceremony where President Bush signed the Pension Protection Act into law. The Act, which received broad bipartisan support in Congress, contains a provision that will save airline employees’ defined benefit pension plans.
“The passage and signing of the Pension Protection Act was the culmination of an unprecedented cooperative effort involving employees from throughout the company, Northwest senior management, and union officials,” Steenland said. “The new law allows us to preserve hard-earned pension benefits at a manageable cost level, a true ‘win-win’ for our employees and for Northwest.”
Strengthening Northwest’s Global Network
Earlier this month, Northwest, along with its joint venture partner KLM, announced an expansion of their European flight network with new service to Brussels, Belgium and Dusseldorf, Germany from Detroit as well as the first nonstop service between Hartford, Conn. and Europe via the joint venture’s hub at Amsterdam, the Netherlands.
In September, Northwest filed an application with the U.S. Department of Transportation detailing the important public benefits of the airline’s application for new daily service between its WorldGateway at Detroit hub and Shanghai, China.
Renewing the Northwest fleet
Earlier this month, Northwest reached agreements with The Boeing Company and Rolls-Royce plc that allow the airline to accept delivery of its new- generation Boeing 787 aircraft, beginning in the third quarter of 2008. The agreements are subject to U.S. Bankruptcy Court approval.
Northwest will be the first North American airline to fly the new 787. “The Boeing and Rolls-Royce agreements are examples of the steady progress we are making in restructuring and optimizing the airline’s fleet,” Steenland added.
Northwest achieved a major restructuring milestone earlier this month with orders from two manufacturers for 72 new, two-class aircraft that each will accommodate 76 customers. Northwest ordered 36 Bombardier Canadair Regional Jet 900s and 36 Embraer 175s that will offer Northwest Airlink customers a “best-in-class” product experience.
During the quarter, Northwest completed a $1.225 billion refinancing of $975 million of existing bank obligations at more favorable terms and gained access to $250 million in incremental liquidity. The new facility can be converted to permanent exit financing, securing part of the debt financing the airline will need to emerge from Chapter 11 protection.
Neal Cohen, executive vice president and chief financial officer, said, “We are pleased to have closed on a new DIP/exit facility which reduces the company’s annual interest expense. Our key stakeholders in the capital markets have recognized Northwest’s progress towards its restructuring goal of positive cash flow and sustained profitability.”
Commenting on the aircraft transactions, he added, “We have now completed restructuring the contracts on our new Airbus and Boeing aircraft as well as our new and existing regional jet aircraft fleets. With these agreements, as well as the other aircraft restructuring actions accomplished during the Chapter 11 process, Northwest will have competitive aircraft ownership costs going forward.”