Cuts narrow NWA's deficit- but 1Q loss still $1.1 BILLION

jenny@nw

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Cuts narrow NWA's deficit
linkBut 1Q loss still hits $1.1 billion
BY MARTIN J. MOYLAN
Pioneer Press
Steep wage cuts, a reduced schedule and lower plane-lease rates helped Northwest Airlines almost break even on its operations in the first quarter, which ended March 31.

The airline, which is in Chapter 11 bankruptcy reorganization, posted an operating loss of $15 million, compared with a loss of $301 million in the first quarter of 2005.

Including $975 million in reorganization charges, though, the Eagan-based airline had a net first-quarter loss of $1.1 billion. That's up from $537 million in 2005.

"Although we have made progress in our restructuring process, we still have work to do to position the company for long-term success," said CEO Doug Steenland.

The operating results provide a glimpse of how Northwest is managing to reshape itself to compete in an airline industry battered by high fuel costs and anemic pricing power.

Northwest had interim or permanent wage and benefit cuts in place for all its employees. It also had fewer employees: 31,318, down 20 percent from a year before. Overall, labor costs in the quarter fell by $288 million to $676 million.

The airline also reduced its flying by 11 percent year-over-year. That meant fuller flights with more fare-paying passengers. Northwest filled 82.3 percent of its seats in the first quarter, up from 78.4 percent in 2005's first quarter.

With its fleet, Northwest reported that it has rejected or reworked leases on 211 planes. It is working toward saving $400 million a year on leases for some 400 planes. Aircraft rental expenses dropped by $36 million in the quarter.

However, the cost of aircraft-maintenance materials and repairs increased by $45 million — or 31 percent — as Northwest shifted maintenance once done in-house to outside vendors.

The airline outsourced most aircraft maintenance after its mechanics went on strike in August.

Northwest used 13 percent less fuel in the quarter. But its cost per gallon jumped 36 percent. Its fuel bill, including taxes, rose 18 percent to $744 million.

Fuel costs have been much higher than expected, said Chief Financial Officer Neal Cohen.

"There remains great uncertainty around this key element of our plan,'' he said in a statement. " … Every dollar per barrel increase (in oil) impacts Northwest's fuel costs by $43 million annually."

Excluding fuel, Northwest's cost of flying one seat one mile, an industry performance benchmark, fell to 8 cents, down about a half cent from the year-ago quarter.

Operating revenue increased 3.3 percent versus the first quarter of 2005 to $2.9 billion.

The airline was able to charge more for tickets. Its yield — what it gets on average to fly a passenger one mile — rose 8 percent to 12.1 cents.

Compared with its closest peer, United Airlines, Northwest managed a narrower operating loss, reported comparable revenue statistics, and had somewhat better operating-cost measures, noted Standard & Poor's credit analyst Philip Baggaley.

United lost $171 million on an operating basis in the first quarter.

Northwest's large bankruptcy-related charges are similar to ones taken by other carriers, Baggaley wrote in a Wednesday report. The charges are mostly for restructuring aircraft leases and debt, and Northwest would record a gain on the discharge of the liabilities upon leaving bankruptcy.

With $1.3 billion in free cash and short-term investments, Northwest's liquidity remains tight. But it should be adequate, given that its cash should grow in the second quarter as travelers book summer travel, Baggaley said.

Northwest's pilots and two groups of ground workers have approved giveback contracts. Flight attendants on Sunday started voting on a contract. Meanwhile, Northwest is talking with two groups of ground workers who rejected proposed deals.

Martin J. Moylan can be reached at [email protected] or 651-228-5479.

NORTHWEST AIRLINES

First Qtr. ended March 31

(in thousands, except per share)


2006 2005
Revenue $2,890 $2,798
Net Inc. $(1,104) $(537)

(loss)


Per Share $(12.65) $(6.19
 
However, the cost of aircraft-maintenance materials and repairs increased by $45 million — or 31 percent — as Northwest shifted maintenance once done in-house to outside vendors.
Why is this a surprise? Obviously repairs and materials expenses (which are the accounts that get hit when work is done by an ourside vendor) will increase when you outsource more of the work, which will coincide with an even greater decrease in payroll related expenses that were incurred when the work was done in-house.

This was some pretty half-assed reporting, as they should have made mention that the total net maintenance expenses (outside repairs, materials, in-house payroll, etc.) for the company are much lower YOY. I suppose the reporter assumed that this would be a pretty obvious issue, as he does clarify that this is driven by increased outsourcing. It was probably assumed that the reader would be able to conclude on their own that the other side of the coin (in-house expenses) were much lower as a result.
 
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Why is this a surprise? Obviously repairs and materials expenses (which are the accounts that get hit when work is done by an ourside vendor) will increase when you outsource more of the work, which will coincide with an even greater decrease in payroll related expenses that were incurred when the work was done in-house.

This was some pretty half-assed reporting, as they should have made mention that the total net maintenance expenses (outside repairs, materials, in-house payroll, etc.) for the company are much lower YOY. I suppose the reporter assumed that this would be a pretty obvious issue, as he does clarify that this is driven by increased outsourcing. It was probably assumed that the reader would be able to conclude on their own that the other side of the coin (in-house expenses) were much lower as a result.

:shock: You're right, Finman. :shock:
288 million in realized savings in payroll versus 45 million dollars in increase in Maintenance from a year ago... Now, is payroll allocated in one big lump or is it dispersed to different departments? Time to get out of the business...and move to health care...like Medtronics or something---.....
LinkLabor Cost Restructuring. The Company is making progress in achieving its target of approximately $1.35 billion (which excludes pension savings) in annual labor cost savings through a combination of agreements negotiated with its employee labor groups, savings generated by the imposed Aircraft Mechanics Fraternal Association (“AMFAâ€) contract, reductions in retiree medical benefit costs, and pay and benefit reductions from its management employees.



The Bankruptcy Code provides special treatment for CBAs. In particular, Section 1113© of the Bankruptcy Code permits the Company to move to reject its CBAs if the Company first satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court’s approval of the rejection or the expiration of the statutorily prescribed time period. After bargaining in good faith and sharing relevant information with its unions, a debtor must make proposals to modify its existing CBAs based on the most complete and reliable information available at the time. The proposed modifications must be necessary to permit the reorganization of a debtor and must provide that all the affected parties are treated fairly and equitably. Ultimately, rejection of the CBAs is appropriate if the unions refuse to agree to a debtor’s necessary proposal “without good cause†and the Bankruptcy Court determines that the balance of the equities favors rejection. In October 2005, the Company commenced Section 1113© proceedings with the PFAA, ALPA, and the IAM, and has subsequently completed the Section 1113© hearing with the PFAA and ALPA.



In 2004, as a first step toward achieving labor savings, the Company reached a bridge agreement with its pilots. The bridge agreement, effective December 1, 2004, generated $285 million in annual labor cost savings from the Company’s pilot and management employees.



On August 19, 2005, the AMFA, which represents mechanics, cleaners and custodians at Northwest, declined to send the terms of the Company’s final contract offer to its membership for ratification and called a strike against the Company. As a result, the Company implemented its previously developed contingency plans. Since August 19, the Company has held multiple negotiations with AMFA, but no resolution has been reached. The Company has subsequently replaced the aircraft mechanics and cleaners who went on strike with a combination of newly hired personnel, AMFA members who crossed the picket lines to reclaim their jobs, and third party contractors.



The Company reached consensual agreements on permanent wage and benefit reductions with employees represented by three of its union groups, the Aircraft Technical Support Association (“ATSAâ€), the Northwest Airlines Meteorology Association (“NAMAâ€) and the Transport Workers Union of America (“TWUâ€), in November 2005. The Company implemented management and salaried pay and benefit reductions on December 1, 2005.



I say their restructuring money was well spent. 1.1 BILLION loss trying to obtain 1.3 BILLION in savings?

No wonder the stocks are .50 cents now.


Now... who's gonna buy us out since we are on SALE????
 
:shock: You're right, Finman. :shock:
288 million in realized savings in payroll versus 45 million dollars in increase in Maintenance from a year ago... Now, is payroll allocated in one big lump or is it dispersed to different departments?
Payroll is rolled up by department into the $288M total savings you mentioned. I don't have a breakout by department, but if I had to guess, I'd say that about $80M-$100M of that savings can be attributed to Tech Ops alone.
 
Why is this a surprise? Obviously repairs and materials expenses (which are the accounts that get hit when work is done by an ourside vendor) will increase when you outsource more of the work, which will coincide with an even greater decrease in payroll related expenses that were incurred when the work was done in-house.

Yea its all about getting it done on the cheap, so the savings can be shared at the top. well its pay me now or pay me later, as the old saying goes. God forbid the next incident like ValuJet should occur, but with all the outsourcing and sending maintenance to the lowest bidder it will dreadfully most likely happen. I guess the one thing you bean counters could find solace in, is the fact that it all looked good on paper.
 
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Yea its all about getting it done on the cheap, so the savings can be shared at the top. well its pay me now or pay me later, as the old saying goes. God forbid the next incident like ValuJet should occur, but with all the outsourcing and sending maintenance to the lowest bidder it will dreadfully most likely happen. I guess the one thing you bean counters could find solace in, is the fact that it all looked good on paper.
That's exactly what the water cooler/cafeteria gossip was at the infamous bldg F during ART last summer. They were saying how it would still be cheaper to have an accident with the outsourced maintenance.

Who cares about the people, who cares who dies, just as long as the bonus looks good to them. :down:
 
Yea its all about getting it done on the cheap, so the savings can be shared at the top. well its pay me now or pay me later, as the old saying goes. God forbid the next incident like ValuJet should occur, but with all the outsourcing and sending maintenance to the lowest bidder it will dreadfully most likely happen. I guess the one thing you bean counters could find solace in, is the fact that it all looked good on paper.
The distinction should probably be made between getting the work done "on the cheap" versus getting the work done more efficiently. I doubt the vendors have a pay scale that is all that much lower than the in-house mechanics, especially adjusted for the varying cost of living factors. Using vendors just allows NWA to not have all of the fixed and unproductive costs of maintiaining a large workforce, and thus only pays for the actual work being done on the aircraft.
 
The distinction should probably be made between getting the work done "on the cheap" versus getting the work done more efficiently. I doubt the vendors have a pay scale that is all that much lower than the in-house mechanics, especially adjusted for the varying cost of living factors. Using vendors just allows NWA to not have all of the fixed and unproductive costs of maintiaining a large workforce, and thus only pays for the actual work being done on the aircraft.
Yea your probably right, your a pencil pusher bean counter who spends his days in atta boy meetings and living in a cubicle. Im just a lowly Mechanic with over twenty years experience in aviation maintenance who has personally seen and reworked that "work done more efficiently" by those "vendors" (Hack Shops) But hey you probably have a degree in finance which makes you more qualified to speak on such matters as quality maintenance.
 
Cheap vendor increases the odds of having an accident. All you got to do finman is look at the Jan 2003 accident of USAIRWAYS EXPRESS/Air MIDWEST Flt that crashed on takeoff. The results were 21 killed due to THIRD PARTY MAINTAINCE and contributed by overweight.
So while numbers may look good to people like you, dont forget it is the pax who buy those tickets that help to pay for the employees.
that is why AMFA should be back at work doing the maintaince work on the planes instead of those HACK ' N ' SHACK MAINTAINCE and SCABS
 
That's exactly what the water cooler/cafeteria gossip was at the infamous bldg F during ART last summer. They were saying how it would still be cheaper to have an accident with the outsourced maintenance.

Who cares about the people, who cares who dies, just as long as the bonus looks good to them. :down:

Jenny it will only affect those types when its one of their own family members which has to be identified thru DNA testing, and the treasured remains are returned in a shoe box. Even then I question the true impact it would have on some!
 
Jenny it will only affect those types when its one of their own family members which has to be identified thru DNA testing, and the treasured remains are returned in a shoe box. Even then I question the true impact it would have on some!
You'll have to explain to me why maintenance done by a third party is inherently less safe than maintenance done in-house. No anecdotals, just pure logical reasons that explain the inherent difference that you and others constantly refer to.

I would think that the maintenance can be done just as safely and with the same degree of quality at a vendor, provided the vendor runs a high quality and efficient operation. If it were proven that NWA performed the proper due diligence and contracted with a company of that caliber, would you guys still be beating the same apocolyptic drum?
 
You'll have to explain to me why maintenance done by a third party is inherently less safe than maintenance done in-house. No anecdotals, just pure logical reasons that explain the inherent difference that you and others constantly refer to.

I would think that the maintenance can be done just as safely and with the same degree of quality at a vendor, provided the vendor runs a high quality and efficient operation. If it were proven that NWA performed the proper due diligence and contracted with a company of that caliber, would you guys still be beating the same apocolyptic drum?

Look finman, I've explained it all before, I've personally witnessed the substandard quality that comes out of some of those third party hack shops, I've personally re-worked maintenance that has been pencil whipped or at best done half ass. If you choose to turn a blind eye, or suggest that I'm just "beating the same apocolyptic drum" then by all means do'nt let my expertise get in the way.

These third party vendors(hack shops) work on an extremely tight budget, they are usually penalized if the aircraft is not produced in a timely manner, most of the mechanics are low skill, many are drifters such as PTO. the hack shops discourage mechanics from looking for discrepancies...I can give reason after reason, but you seem to be of the opinion that its the same quality as in house.
Thats fine keep on believing it, I know better and so does PTO The legendary SCAB mouthpiece.

Perhaps you will someday get to witness substandard/outsourced maintenance first hand at thirty thousand feet, then we shall see who beats the apocolyptic drum, that is if you survive the plunge.

I'll leave you with just one of many personal experiences I had with third party hack shops finman, some years ago when I was just starting out in Aviation, I took a job at a third party vendor, being green and young and eager to gain the experience in order to move up to the 'Big Boys' not long after taking the job I had a crew chief tell me "What ever you do, remember that N# on that particular aircraft and don't let your family fly on it" I was shocked and disturbed but yet I did'nt understand how serious he was until after working there a few years. I left and never looked back, you can down play it all you want, But Ive seen it firsthand.
 
finman, go ask 700uw and other us air mechs. about the substandard maintaince that was performed on the Airbus planes once it was out of the Alabama HACK'N'SHACK. Needless to say, the cost of loss of revnue and unexpected emergence landings due to severe maintaince issues attributed to the Alabama HACK'N'SHACK caused to the company. That is very similar to what is currently occurring at SCAB AIR
 
Using vendors just allows NWA to not have all of the fixed and unproductive costs of maintiaining a large workforce, and thus only pays for the actual work being done on the aircraft.

All the more reason we should have/could have turned DLH into a profit center (ala Lufthansa Technik)...
 
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You'll have to explain to me why maintenance done by a third party is inherently less safe than maintenance done in-house. No anecdotals, just pure logical reasons that explain the inherent difference that you and others constantly refer to.

I would think that the maintenance can be done just as safely and with the same degree of quality at a vendor, provided the vendor runs a high quality and efficient operation. If it were proven that NWA performed the proper due diligence and contracted with a company of that caliber, would you guys still be beating the same apocolyptic drum?
If you were in some management position, ever ran a actual store front business or a buyer for a large company, you would know this yourself.

Finman, are there actual NW or Quality Assurance person that does check out the vendors and locations to see exactly how they perform? Are they able to go to these places unannounced? Or are the vendors courting the quality assurance people taking them out on dates to the local tourist attractions like some titty bar? How come one of the managers at TIMCO is a former manager for Northwest airlines?

On the notion that - the planes are actually DIRTY, Smelly, Broken (lavs, jumpseat, lights, ect) I surmrise that there is no good work being done and Northwest lost the quality workers they invested $ into.
 

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