Pilots and management at Northwest Airlines (OTC BB: NWACQ.PK) just finished playing a game of chicken. Management and pilots reached an agreement, but after losing $2.6 billion last year -- and more than $4 billion since 2001 -- things still aren't looking particularly rosy for the embattled carrier.
Northwest filed for Chapter 11 bankruptcy protection last September, after it couldn't cut enough costs to stay in the black. To stay alive, the company must increase revenue, decrease costs, or both. Northwest is currently concentrating on costs: reducing the size of the fleet, reducing the number of available seat miles (which means fewer flights), renegotiating airplane purchase and lease agreements, and reducing salaried employee and management pay levels.
Despite the cuts, labor -- including pilots, flight attendants, and other workers -- is expected to compose the majority of Northwest's expenses, at roughly $1.4 billion per year.
A few days ago, the flight attendant union agreed to a $195 million annual cut. Ground workers are considering a contract settlement their union recently reached with Northwest. Three other employee unions have already ratified their own agreements; the remaining hurdle was the pilot's union. Pilots had already seen a cut of $215 million annually and layoffs totaling 7.8% of their ranks, but according to management, more concessions were needed.
The pilots, by a 92% margin on a 90% turnout, approved strike authorization if management tried to impose new working conditions. The company had filed a motion in bankruptcy court requesting just that, and a ruling was expected last Thursday, the day after discussions between the union and management seemed to break down.
However, the judge delayed ruling and the company and pilots continued talks, reaching an agreement of $358 million in annual cuts last Friday.
Northwest narrowly dodged a bullet, since a pilots' strike might have brought down the entire company. Finding and training replacement pilots would not be as easy as it was with mechanics last summer. Gerald Grinstein, CEO of Delta Air Lines (OTC BB: DALRQ.PK), whose company is still locked in a similar battle, has said that Delta would be "cooked" if the pilots strike. As if to accent the very fragile nature of this and all labor negotiations, baggage handlers recently voted down proposed pay cuts and authorized a strike; this is admittedly less severe than a pilots' strike, but nonetheless indicates the contentious nature of the situation itself.
Northwest and other legacy airlines' options seem fairly simple: reduce labor costs and staffing levels and increase capacity utilization, or face more tough times. And even if they can bring expenses down, the established carriers' futures are anything but secure.
Fool contributor Jim Mueller knows low fares hurt airlines, but he still likes cheap flights. He does not own shares in any company mentioned. The Fool is investors writing for investors.
