Northwest Airlines Corporation (NYSE: NWA) today (July 31) reported a net profit of $2.15 billion for the second quarter of 2007. This compares to a second quarter 2006 net loss of $285 million. Excluding reorganization items, Northwest reported a second quarter pre-tax profit of $273 million, compared to a pre-tax profit of $179 million in the second quarter of last year.
Excluding reorganization items and a $6 million out of period mark-to-market loss on fuel hedges, Northwest reported an 8.8 percent second quarter pre-tax margin. For the first half of 2007, Northwest reported a $373 million pre-tax profit before reorganization items.
Doug Steenland, president and chief executive officer, said, “Our second quarter financial results are evidence of the results of our restructuring. Northwest is well positioned to generate sustained profitability and steady earnings growth for the long term. However, our operational performance in June and July has been unacceptable and we must restore NWA to its historical position as one of the most reliable airlines in the industry. Our immediate focus is to restore operational reliability.”
“We sincerely apologize for the inconvenience these cancellations have caused our customers. We are confident that the measures we are taking will result in materially better operational performance during the coming months,” Steenland said. “We realize that the recent operational challenges have been difficult for our employees and we thank them for their tireless efforts to assist our customers.”
OPERATIONS
During the latter part of June, Northwest experienced numerous flight cancellations caused by summertime thunderstorms on the east coast and at several Northwest hubs, air traffic control congestion, and increased pilot absenteeism. The airline experienced another significant increase in flight cancellations over the past weekend, which were caused largely by an increase in pilot absenteeism.
Northwest is taking a series of actions to improve its operational reliability. These include short-term measures to minimize the risk of additional disruptions in August, and systemic operational adjustments to address concerns raised by Northwest pilots:
For August, to create additional reserves and reduce the maximum number of hours that our narrowbody pilots will be asked to fly, Northwest reduced the month’s schedule by 4 percent. The maximum hours for all narrowbody aircraft pilots in August will be 86, as compared to 88 or 90 hours in June.
Beginning in August, Northwest is reducing the number of long trips in certain fleet types and changing the way we build trips to and from large East Coast cities. This will minimize the impact on the entire system when delays occur due to bad weather and air-traffic control congestion.
As of August 1, all furloughed pilots wishing to return to Northwest will have received their official training date, producing some of the highest numbers of reserve pilots in recent history.
Once we have recalled all of the eligible pilots from furlough, we will begin hiring new pilots. To date, we have received several hundred expressions of interest from pilots wishing to work for Northwest.
We reached an agreement with our pilots through which, in exchange for the settlement of certain grievance issues, we modified several contractual provisions, which will improve the pilot bidding process. These changes are being implemented and will be in full effect by October.
We are currently in discussions with the Air Line Pilots Association (ALPA) about other steps we could take to address pilot concerns and improve the reliability of the operation.
Spare international widebody aircraft are being redeployed on domestic routes.
We have improved processes and technology to make customers aware of flight changes as far in advance as possible.
FRESH-START REPORTING
Upon emergence from bankruptcy on May 31, 2007, the company adopted fresh start reporting. Under fresh start reporting, Northwest revalued its assets and liabilities to estimated market values. In addition to these fair value adjustments, the company changed its presentation of certain regional carrier-related revenue and expense items, acquired Mesaba Aviation, and changed its policies pertaining to the accounting for frequent flyer obligations and breakage of passenger tickets. These non-cash adjustments affected Northwest’s balance sheet, statement of operations, and statement of cash flows. As a result, Northwest’s financial statements on and after June 1, 2007 are not comparable to its previously issued financial statements.
FINANCIAL RESULTS SUMMARY
Operating revenues in the second quarter decreased 3.3 percent versus the second quarter of 2006 to $3.18 billion. Excluding fresh-start adjustments, system consolidated passenger revenue increased 0.1 percent to more than $2.8 billion on 0.9 percent higher available seat miles (ASMs). Consolidated revenue per available seat mile decreased by 0.8 percent for the second quarter versus last year.
Operating expenses in the quarter decreased 5.7 percent year-over-year to $2.82 billion, while mainline cost per available seat mile (CASM), excluding fuel, decreased by 5.2 percent on 1.6 percent more ASMs.
The pre-tax impact of the operational disruptions in the second quarter is estimated to be approximately $25 million.
During the second quarter, fuel averaged $2.04 per gallon, excluding taxes and non-cash mark-to-market expenses related to future period contracts, down 2.7 percent versus the second quarter of last year.
Dave Davis, executive vice president and chief financial officer, said, “In the second quarter, we continued to realize the benefits of our cost restructuring as evidenced by a five percent reduction in mainline CASM, excluding fuel. This is the best performance in the industry. Continued focus on cost control, combined with prudent investment in our product and a return to running a reliable operation, will allow NWA to continue to achieve strong financial results.”
Northwest's quarter-ending unrestricted cash and short-term investments balance was $3.3 billion. Including $706 million of restricted cash, the total cash balance was $4 billion.
SIGNIFICANT DEVELOPMENTS
Discussing the company’s emergence from bankruptcy, Steenland added, “Northwest has achieved the key objectives of its restructuring plan including a competitive cost structure and one of the strongest balance sheets in the industry. Standard & Poors and Moody’s have assigned Northwest B+ and B1 corporate credit ratings, respectively, which are the highest ratings among network carriers.”
Since the start of the second quarter of 2007, these were among the significant developments at NWA:
The company emerged from bankruptcy on May 31. That day, seventeen Northwest Airlines employees rang the opening bell at the New York Stock Exchange and the company’s new common stock “NWA” began trading.
In early July, Northwest distributed to flight attendants the proceeds that were generated from the sale of a $182 million unsecured claim that was included in the Association of Flight Attendants’ approved labor contract. The allocation completed the sale of contract employees’ unsecured claims negotiated during the carrier’s Chapter 11 restructuring, totaling $1.25 billion for all labor groups. The total dollar amount paid to contract employees was $960 million. “When we originally negotiated the claims, the expected sale price was 15 cents on the dollar, which implied a total claims value of $180 million. Instead, as a result of our successful restructuring, those unsecured claims are worth $960 million, a $780 million improvement over what was expected,” Steenland added. The claims were in addition to a separate gain-sharing program that will see contract employees and non-executive salaried staffs receive an additional $500 million in profit sharing through the end of 2010 as Northwest achieves its business plan targets. For the first half of 2007, Northwest accrued $33 million in profit sharing. “Claims sales and gainsharing are allowing Northwest employees to share in the airline’s continued success. In addition, Northwest completed its Chapter 11 process without having to terminate its employee pension plans,” he said.
The airline is continuing to take delivery of Airbus A330 and 76-seat regional jetliners as part of its $6 billion international and domestic fleet renewal program. Next year, Northwest will be the first airline in North America to begin passenger service with the new, long-range Boeing 787. “As we move forward, NWA will continue to see increased benefits from its fleet renewal program which will significantly improve the travel experience for our customers and the profitability of the airline,” Steenland added.
The company achieved numerous milestones in launching its wholly-owned 76-seat regional jet operations including:
In early April, Compass Airlines won final Federal Aviation Administration approval to begin commercial operations.
In late April, Mesaba Aviation was acquired by the company and became a wholly-owned subsidiary.
Seven 76-seat dual-class regional jets were delivered, including six Bombardier next-generation CRJ-900 aircraft and one Embraer 175 aircraft, towards a total of 72, 76-seat regional jet aircraft by the end of 2008.
In late June, Northwest, along with SkyTeam carriers Air France, Alitalia, CSA Czech Airlines, Delta Air Lines, and KLM Royal Dutch Airlines applied to the U.S. Department of Transportation (DOT) for antitrust immunity on transatlantic flights. Delta currently has antitrust immunity with Air France, Alitalia and CSA, while Northwest has antitrust immunity with KLM. Included in the application is a joint venture agreement between Air France, Delta, KLM and Northwest that would create a comprehensive and integrated partnership among the four SkyTeam members across the Atlantic. A more integrated SkyTeam alliance offers significant advantages to consumers, including more choice in flight schedules, travel times, services and fares.
In mid-July, Northwest applied to the DOT for new rights to operate nonstop service between Detroit and Shanghai and Detroit and Beijing. The application is in response to the new landmark aviation agreement with China that provides for additional service between the two countries. The U.S. government plans to award six new routes between 2007 and 2009. “Northwest has a long history of serving China and it wants to begin new service there as soon as possible,” Steenland said. “Northwest’s WorldGateway hub at Detroit is one of the top airport facilities in the world and it offers an unmatched combination of broad network coverage of the entire eastern half of the United States and convenient direct routings.”
During the second quarter, NWA began operating modified Boeing 757-200s as part of its transatlantic operation. These aircraft feature a new two-class 160-seat cabin and fuel-efficient winglets.
Northwest Airlines in the second quarter continued to champion online innovation by becoming the first airline to provide customers functionality to purchase tickets, check in for flights, and complete any transaction on its nwa.com website by using any web-enabled handheld device or wireless browser, such as Blackberrys, Treos and web-based cell phones. In late June, Northwest became the first airline to offer PayPal as a method of payment on nwa.com. -Northwest Airlines
