Northwest targets labor costs
Liz Fedor, Star Tribune Staff Writer
Published November 13, 2003 NWA13
If you take away the cost of labor, Northwest Airlines and AirTran Airways, a rapidly growing low-fare carrier, had identical operating costs in the third quarter.
But compare Northwest's labor costs with a dozen U.S. airlines, and you'll find the Eagan-based airline has the third-highest labor costs in the industry. The message:
"The biggest issue we have facing us is our labor costs," Bernie Han, Northwest's chief financial officer, told Wall Street analysts Wednesday at a New York conference.
Han used detailed charts to underscore the huge divide between Northwest's labor and non-labor costs. After seven rounds of cost-cutting since 2001, Northwest is renewing its commitment to reduce its annual labor costs by about $1 billion a year -- a goal the airline's labor unions do not all share.
Han, speaking at a Citigroup Smith Barney transportation conference, did not spell out a deadline for achieving the labor cuts. However, he stressed that Northwest's labor costs are "significantly higher" than its low-cost competitors.
In the third quarter, Northwest and AirTran each spent 4.1 cents on non-labor costs to fly one seat one mile on their route systems -- a standard industry measure. In contrast, Northwest spent 3.8 cents per seat mile on labor, while AirTran spent 2.3 cents.
On Wednesday, AirTran launched daily nonstop service to San Francisco, the 45th market served by the fast-growing, Florida-based airline. Low-fare carriers have been adding routes and ordering new planes and now serve 25 percent of the domestic market -- an aggressive growth strategy that's possible, in part, because of the higher labor costs of their bigger competitors.
On several measurements, Northwest is outperforming its historic peer group -- American, United, Delta, Continental and US Airways. Judged by the relative size of the Big Six carriers, Northwest had the highest cash balance at the end of September. Northwest and Continental were the only airlines among the Big Six to turn a profit in the third quarter, and Northwest had the best on-time performance during the summer travel season.
But Han said it is no longer good enough to perform well in comparison to the big carriers. "The real competition is the low-cost carriers, which are growing rapidly and are quite profitable, so we do have to address our labor costs," Han said.
In the third quarter, Northwest's unit labor costs were double those paid by two low-fare carriers -- JetBlue and ATA, which paid 1.9 cents per seat mile for labor.
Northwest started rolling out concessionary proposals to its labor unions in February. The company is seeking permanent cost restructuring agreements, which include wage and benefit cuts and work rule changes.
So far, none of the unions have embraced cuts.
(This is a stretch for the mechanics who have lost 50% +/- of work and members?)
Han told analysts that Northwest is in talks with its pilots and ground workers.
The Air Line Pilots Association contract at Northwest opened up in September. In a recent bulletin to pilots, Northwest ALPA Chairman Mark McClain said Northwest "does not face an imminent cash crisis," but he noted that the company is expected to post losses in the fourth quarter of this year and first quarter of next year.
Pilot leaders consistently have said Northwest faces financial problems, but they want union workers to see financial rewards when the company's condition improves.
"It is troubling that the leadership at other large NWA unions have still not acknowledged the seriousness of our company's financial condition," McClain said in a late October memo to pilots.
Contracts for mechanics and flight attendants run through 2005, and union leaders for those employee groups have refused to engage in concessionary talks with Northwest.
The International Association of Machinists and Aerospace Workers (IAM) is at the bargaining table with Northwest. The IAM is the largest union at Northwest and represents ground workers, including customer service agents, baggage handlers and clerical employees.
In late August, the IAM and Northwest asked the National Mediation Board for help. The two sides returned to the bargaining table last week, and Northwest also gave IAM leaders a presentation on its financial condition.
On its Web site, IAM leaders said Northwest presented "the usual gloom and doom data comparing NWA to other carriers," but reported that IAM financial consultant Tom Roth has a different interpretation of some of those statistics.
Management and the unions have not given any indication that there will be a quick resolution to the labor cost issue. However, it will remain a paramount concern.
"Without a doubt," Han said, the cost of labor is "the biggest issue for Northwest."
Liz Fedor is at [email protected]
Liz Fedor, Star Tribune Staff Writer
Published November 13, 2003 NWA13
If you take away the cost of labor, Northwest Airlines and AirTran Airways, a rapidly growing low-fare carrier, had identical operating costs in the third quarter.
But compare Northwest's labor costs with a dozen U.S. airlines, and you'll find the Eagan-based airline has the third-highest labor costs in the industry. The message:
"The biggest issue we have facing us is our labor costs," Bernie Han, Northwest's chief financial officer, told Wall Street analysts Wednesday at a New York conference.
Han used detailed charts to underscore the huge divide between Northwest's labor and non-labor costs. After seven rounds of cost-cutting since 2001, Northwest is renewing its commitment to reduce its annual labor costs by about $1 billion a year -- a goal the airline's labor unions do not all share.
Han, speaking at a Citigroup Smith Barney transportation conference, did not spell out a deadline for achieving the labor cuts. However, he stressed that Northwest's labor costs are "significantly higher" than its low-cost competitors.
In the third quarter, Northwest and AirTran each spent 4.1 cents on non-labor costs to fly one seat one mile on their route systems -- a standard industry measure. In contrast, Northwest spent 3.8 cents per seat mile on labor, while AirTran spent 2.3 cents.
On Wednesday, AirTran launched daily nonstop service to San Francisco, the 45th market served by the fast-growing, Florida-based airline. Low-fare carriers have been adding routes and ordering new planes and now serve 25 percent of the domestic market -- an aggressive growth strategy that's possible, in part, because of the higher labor costs of their bigger competitors.
On several measurements, Northwest is outperforming its historic peer group -- American, United, Delta, Continental and US Airways. Judged by the relative size of the Big Six carriers, Northwest had the highest cash balance at the end of September. Northwest and Continental were the only airlines among the Big Six to turn a profit in the third quarter, and Northwest had the best on-time performance during the summer travel season.
But Han said it is no longer good enough to perform well in comparison to the big carriers. "The real competition is the low-cost carriers, which are growing rapidly and are quite profitable, so we do have to address our labor costs," Han said.
In the third quarter, Northwest's unit labor costs were double those paid by two low-fare carriers -- JetBlue and ATA, which paid 1.9 cents per seat mile for labor.
Northwest started rolling out concessionary proposals to its labor unions in February. The company is seeking permanent cost restructuring agreements, which include wage and benefit cuts and work rule changes.
So far, none of the unions have embraced cuts.
(This is a stretch for the mechanics who have lost 50% +/- of work and members?)
Han told analysts that Northwest is in talks with its pilots and ground workers.
The Air Line Pilots Association contract at Northwest opened up in September. In a recent bulletin to pilots, Northwest ALPA Chairman Mark McClain said Northwest "does not face an imminent cash crisis," but he noted that the company is expected to post losses in the fourth quarter of this year and first quarter of next year.
Pilot leaders consistently have said Northwest faces financial problems, but they want union workers to see financial rewards when the company's condition improves.
"It is troubling that the leadership at other large NWA unions have still not acknowledged the seriousness of our company's financial condition," McClain said in a late October memo to pilots.
Contracts for mechanics and flight attendants run through 2005, and union leaders for those employee groups have refused to engage in concessionary talks with Northwest.
The International Association of Machinists and Aerospace Workers (IAM) is at the bargaining table with Northwest. The IAM is the largest union at Northwest and represents ground workers, including customer service agents, baggage handlers and clerical employees.
In late August, the IAM and Northwest asked the National Mediation Board for help. The two sides returned to the bargaining table last week, and Northwest also gave IAM leaders a presentation on its financial condition.
On its Web site, IAM leaders said Northwest presented "the usual gloom and doom data comparing NWA to other carriers," but reported that IAM financial consultant Tom Roth has a different interpretation of some of those statistics.
Management and the unions have not given any indication that there will be a quick resolution to the labor cost issue. However, it will remain a paramount concern.
"Without a doubt," Han said, the cost of labor is "the biggest issue for Northwest."
Liz Fedor is at [email protected]
