FLUG REVUE May 2003: Northwest Airlines fights slump

COST-CUTTING AT NORTHWEST

By Volker K. Thomalla

These days “cost-cutting” is one of the most-used terms in the American airline industry. But at the same time it is probably also one of the most hated words. At Northwest Airlines, which is based in St. Paul, Minnesota, “cost-cutting” is part of the routine daily vocabulary.

Richard H. Anderson, CEO of Northwest Airlines, testifying before a Senate committee in Washington on 9 January, portrayed the situation of the airline in these terms: “Northwest in 2002 operated an airline about the same size as we did in 1996. But our costs were over $1 billion higher in 2002 than they were in 1996. Comparing August 2002 to August 2000, our actual passenger revenue declined 20%, on 9% less capacity and 500,000 fewer enplaned passengers, an 8% decline. During the same time period, Northwest's total operating expenses declined 11%.”

Airbus A319 in Northwest colours

Airbus A319

The yawning gap between costs that are falling slightly and plummeting revenues is also reflected in the financial accounts of the fourth largest American airline: in eight out of the last nine quarters the company made a loss. The loss for the fourth quarter of 2002 (including non-recurring elements) came to $488 million, while the cumulative loss for the whole year stood at $798 million. Northwest is not even one of the American airlines most severely affected. Yet the drastic figures show that Northwest is under enormous cost pressure, for in the present economic climate there is little prospect of achieving revenue growth through improved utilisation or higher fares. Above all, the airlines are suffering from a dearth of business travellers, who in the past paid high ticket prices. Northwest is no exception in this respect.

The $3.8 billion annual wage bill for the approximately 19,000 employees is one of several factors forcing Northwest to adopt drastic measures so as to avoid the financial situation pushing the airline into bankruptcy. Only at the beginning of March the Northwest's management called on its cockpit crew to make a significant contribution towards the cost cuts. Pilots were asked to accept a salary reduction back to the level of 1996 while at the same time foregoing fringe benefits.

To at least partially offset the rise in oil prices since the end of last year, Northwest has required all passengers with heavily discounted tickets to pay a fuel surcharge of $10 per passenger and flight.

The fleet structure is also contributing to the carrier's high operating costs. Along with labour costs, reorganisation of the fleet and the route network is another critical element of the cost-cutting programme at Northwest. On the transpacific routes, the Boeing 747-400 continues to be the workhorse. Northwest has sixteen 747-400's in its inventory and holds options for two further aircraft of this type. The 747-200, of which the fleet includes eighteen, is still going strong. Northwest retired the DC-10-40 in 2002, but it is still operating the DC-10-30, especially on the European routes. But the trijets' days at Northwest are numbered, as the A330 has already been selected as successor. Northwest has ordered 24 of the twinjets from Toulouse, and has taken out options for a further 36.

Measures are also in hand to simplify the domestic fleet – and here “domestic routes” also includes routes to Canada and Mexico – from five types to three. The first victim of this fleet simplification programme is the Boeing 727, which was taken out of active service in January. Tim Rainey, senior vice president of flight operations, said after the last 727 scheduled flight landed on 7 January, “Replacing the Boeing 727 with the A319/A320 aircraft family provides customers with added space and comfort, reduced noise levels in the communities we serve and allows Northwest to operate a more cost-efficient and reliable fleet.” But although the 727s will not be used on any more regular flights, Northwest is to fly some of the elderly Boeing triple-engined planes on charter services linked with sporting events for a few more months.

On the other hand this year fewer new aircraft will join the fleet than planned. At the end of 2002 the airline made the decision to defer delivery of 13 Airbus types scheduled to enter the fleet between 2003 and 2005, by an average of two years.

Once the fleet simplification is complete, Northwest will then operate only the DC-9, the A319/A320 and the Boeing 757 on its north American routes. According to the airline the aim is, of all the major carriers that operate hubs, to become the airline with the lowest operating costs in the United States.

The outward appearance of the fleet is to be revamped along with the planes themselves. Studies are currently under way to select a new Northwest aircraft livery, which is expected to be unveiled this spring.

Northwest decided some time ago to pursue a strategy of developing a dense network through collaborative agreements with other airlines. Codeshare agreements exist on selected routes, for example, with Air Alps, Air China, Alaska Airlines, American Eagle, America West, Big Sky, Hawaiian Airlines, Horizon Air, Malev and Transavia. However, Northwest's closest ally is the Dutch KLM airline (see FLUG REVUE. 4/2003). Since 1991 an agreement has been in place that extends far beyond other airline collaborations.

This alliance policy meant that as of February 2003 Northwest and its partner airlines were offering some 1,500 flights per day to 750 cities in five continents, with the airline operating its own hubs in Minneapolis/St. Paul, Memphis, Tokyo and Amsterdam.

To assist the beleaguered airlines, the US Department of Justice and the Department of Transportation in January 2003 approved a codeshare alliance agreement between the three major US airlines, Delta Air Lines, Continental Airlines and Northwest Airlines, albeit with tough conditions attached. Such an agreement between the major players in the industry would never have been allowed under normal circumstances. The airlines are hoping through the agreement to be able to achieve multi-million savings annually while streamlining the capacity offered more in line with demand. Further savings may be possible through the shared use of infrastructure.

But whether these measures will together be sufficient to restore the airlines generally and Northwest in particular to financial health, even CEO Anderson does not know. In January he warned the Senate committee in Washington, “The overhang of war in the Middle East and its impact on fuel prices and demand is one of the biggest risks facing the airline industry right now. A war with Iraq would raise fuel costs, lead to a drop in passenger traffic and increase security measures at airports and airlines as further security precautions become necessary. In addition, carriers would have to bear an extra cost for rerouting their flights around air space in the Middle East. War would delay any recovery in the industry that is still under severe strain from the effects of the terrorist attacks of September 11th.” At the same time he demonstrated unshakeable optimism: “Notwithstanding the huge challenges we face, I am optimistic that we will find a way to navigate through this storm. The airline industry is an indispensable component of our national economy. We at Northwest intend to succeed.”

From FLUG REVUE 5/2003

Last updated 7 April 2003

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