U.S. News

Northwest CEO Tells CNBC: Co. Will Emerge Strong From Bankruptcy


Northwest Airlines, which is set to exit bankruptcy Thursday, is coming out of the restructuring process "really strong," said Douglas Steenland, chief executive officer at Northwest Airlines.

“We have a best-in-class cost structure, we have a revenue premium to the industry, we received the highest credit rating amongst the network carriers from S&P, and we’re in the middle of a very significant fleet renewal program," Steenland told CNBC. "We think we’re positioned well to compete with the rest of the airlines and to provide great service to our customers.”

Northwest's emergence from bankruptcy marks the end of a 20-month spell in Chapter 11 for the No. 5 U.S. carrier, and the first time in almost five years that a major U.S. airline has not been in bankruptcy.

Northwest Exits Chapter 11

Northwest has spent the last year and a half hacking $2.4 billion off its annual costs, mostly from an aggrieved work force. Like other so-called "legacy' airlines, it has been forced to drastically slash its costs to keep pace with newer low-cost carriers and deal with wild spikes in fuel costs.

The company will officially relaunch as a slimmed-down carrier when Steenland rings the opening bell on the New York Stock Exchange Thursday.

Its shares will trade on the Big Board, marking the first time Northwest stock has changed hands on a major public exchange since it was delisted from Nasdaq in September 2005.

Northwest's emergence from bankruptcy protection appears to signal the end of a five-year period of extreme turbulence for U.S airlines, as it and its rivals have made huge strides toward ensuring their long-term survival.

But despite major cost cuts, Northwest faces intense competition, soaring fuel prices and furious employees who resent forfeiting $1.4 billion annually only to see their bosses net enormous payouts from stock and options awards.

Employee rage swelled this month when the company revealed a management compensation plan that awards Steenland stock and options potentially worth more than $20 million.

"Northwest may be emerging from Chapter 11, but it has a long way to go," said Anthony Sabino, a law professor at St. John's University in New York.

"Much of the carrier's unionized work force is tremendously unhappy. And in an intensely competitive and service-oriented industry such as the airlines, the bad blood could cost Northwest dearly, if not doom it altogether," he said.

Surviving in a Troubled Industry

Northwest, which has cut its debt and leasing obligations by $4.2 billion, is not facing these challenges alone. Three of the big U.S. carriers --- Northwest, Delta Air Lines and UAL Corp's United Airlines -- have all been in Chapter 11 in the last five years.

U.S. Airways Group also went bankrupt and was saved from liquidation only by a merger with America West Airlines. AMR Corp.'s American Airlines restructured without entering bankruptcy.

Without exception these airlines grappled with peeved workers, low-fare competition and soaring fuel prices.

The industry mounted a recovery in 2006 thanks to a string of revenue-boosting fare rises, but several failed fare increases in 2007 suggest rising fares are at an end.

Meanwhile, domestic competition is increasingly vigorous thanks to new entrants such as Virgin America Airlines and Skybus Airlines Consequently, top airlines have warned of excess domestic capacity, which could erode pricing power.

In a government filing Tuesday, Northwest predicted softening domestic revenue in 2007 due to industry supply increases and a slowing economy.

"I think they are very sensitive to the tenuous state of domestic demand," said Velocity Group airline consultant Doug Abbey.

He said, however, that Northwest is better positioned than most airlines to support higher fares because of its dominance at its hubs in Detroit and Minneapolis.

"They really dominate those airports with relatively little low-cost competition," Abbey said. "They're in a strong position to maintain higher yields."

Some airlines have reacted by moving capacity to lucrative international routes where they face less competition.

Northwest also has tweaked its domestic operations by acquiring its regional partner Mesaba Airlines. It also has launched a regional subsidiary called Compass Airlines.

Consolidation Outlook

Some, such as U.S. Airways CEO Doug Parker, have said airline mergers are the key to long-term survival as they alleviate excess capacity.

Early this year, talk of potential industry consolidation was rampant. Speculation died down in recent months, although some still believe consolidation is in the cards – perhaps even a Northwest-Delta merger.

In January, Delta beat back a hostile takeover bid from U.S. Airways, which in 2005 merged with America West Airlines.

"I'm just presuming, absent any crisis, airlines will do moderately well over the next six months, and then if things go south ... then I think we'd see consolidation rear its ugly head again," Abbey said.