So Far So Good
Northwest, unable to reach agreement with its mechanics, implemented its contingency plans early Saturday morning as the mechanic union called a strike. It is still early in the process, but from all appearances, the contingency plan is working effectively (we didn't expect 100% completion factors, etc.). Given media handling of the issue, we do not see material "book away" risk.
We view this outcome as positive, but we refer investors to our note on Thursday morning where we cautioned that a resolution with the mechanics was but one piece of the puzzle. From here, we expect concern will shift towards negotiations with other labor groups, particularly flight attendants, though their lack of support for the AMFA strike is clearly a positive sign. We also believe there is a distinct possibility that the company will look to set a formal deadline for negotiations shortly given mid $60s energy prices.
The contingency plan seems to be working and the company obviously thought through it carefully and thoroughly. We have formulated very rough performance statistics using publicly available Air Traffic Control data and the OAG tapes.
In analyzing arrivals of more than 1,200 flights in Northwest hub cities, we observed a completion factor north of 95% on Saturday and on time performance (within 14 minutes) of 70-75%.
As of 8:00 PM Sunday, completion factor was north of 95% for the day and on time performance had improved to 75-80%. Saturday performance no doubt suffered from work slowdowns by the mechanics Friday night before the strike officially began. The plan is working, but execution risk remains. Northwest has to be able to consistently operate a good airline. So far, we like what we see.
We suspect that Northwest shares will react favorably to this news, but last week saw a positive shift in sentiment and, presumably, a lot of short-covering. It is, therefore, hard to predict where the shares will settle later in the week. We are taking a longer-term view on the issue. We see a stock worth $8-10 following concessions, which we still see as a probable event. For that reason, we continue to like the
risk-reward in NWAC shares, but only investors willing to see this process through to its end should entertain this opportunity.
We welcome your questions and comments,
Gary
