Form 8-K for NORTHWEST AIRLINES CORP
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1-Jul-2005
Other Events
Item 8.01 Other Events
Labor and Pension Update
The Board of Directors of Northwest Airlines Corporation, at its regularly scheduled meeting on June 30, 2005, reviewed management's plan to obtain labor cost savings and to seek legislation addressing its pension funding challenges. In addition, management reviewed with the Board a plan to attempt to obtain additional liquidity through new financings and the extension of existing debt maturities upon the receipt of the labor cost savings and pension relief noted above. The Board directed management to proceed with this plan.
The Board also discussed what the Company's situation would be if it were not able to achieve the labor and pension relief that the Company is seeking. As the Company has previously disclosed, permanent structural changes in the operating environment of the U.S. airline industry have placed the Company in a state of significant financial distress. Since the beginning of 2001, the Company has lost over $3.3 billion. Even as the Company has incurred these substantial losses, it has maintained adequate liquidity through the sale of non-strategic assets or by obtaining new financing. However, as also previously disclosed, the limited amount of unencumbered assets available for these purposes and the Company's current level of indebtedness and losses are likely to prevent the Company from accessing any additional liquidity. As a result, the Company's financial viability primarily depends on two principal factors: 1) its ability to obtain significant annual salary and benefit reductions through wage, work rule and benefit changes; and 2) together with a freeze of the Company's defined benefit plans, legislative reform of existing pension funding requirements that would provide the Company sufficient time to make up the current funding shortfall in those plans, which approximates $3.8 billion.
The Company is currently in mediated labor negotiations under Section 6 of the Railway Labor Act with AMFA, the IAM and PFAA and has also had discussions with ALPA. The failure to obtain labor cost restructuring will force the Company to consider other alternatives, including Chapter 11. The recent spike in fuel prices (which have topped $60 per barrel) has accelerated the need for the Company to obtain labor cost savings.
In addition to labor cost restructuring, the Company must also obtain pension reform. The estimated cash contributions to the Company's defined benefit plans for calendar years 2006 and 2007 are expected to be approximately $800 million and $1.7 billion, respectively. The U.S. Congress is currently considering a variety of proposed pension legislation, including the Employee Pension Preservation Act of 2005 (the "Pension Preservation Act"), which was introduced in the U.S. Senate on April 20, 2005. Under the Pension Preservation Act, an airline could extend to 25 years the time during which payments can be made of any unfunded liability existing under its qualified defined benefit pension plans at the date of the airline's election to comply with the Pension Preservation Act. Such an extension of payments could occur under the Pension Preservation Act if an airline elected to freeze its qualified defined benefit pension plans. To date, no pension reform legislation has been enacted. Failure to obtain pension funding relief will also cause the Company to consider Chapter 11.
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1-Jul-2005
Other Events
Item 8.01 Other Events
Labor and Pension Update
The Board of Directors of Northwest Airlines Corporation, at its regularly scheduled meeting on June 30, 2005, reviewed management's plan to obtain labor cost savings and to seek legislation addressing its pension funding challenges. In addition, management reviewed with the Board a plan to attempt to obtain additional liquidity through new financings and the extension of existing debt maturities upon the receipt of the labor cost savings and pension relief noted above. The Board directed management to proceed with this plan.
The Board also discussed what the Company's situation would be if it were not able to achieve the labor and pension relief that the Company is seeking. As the Company has previously disclosed, permanent structural changes in the operating environment of the U.S. airline industry have placed the Company in a state of significant financial distress. Since the beginning of 2001, the Company has lost over $3.3 billion. Even as the Company has incurred these substantial losses, it has maintained adequate liquidity through the sale of non-strategic assets or by obtaining new financing. However, as also previously disclosed, the limited amount of unencumbered assets available for these purposes and the Company's current level of indebtedness and losses are likely to prevent the Company from accessing any additional liquidity. As a result, the Company's financial viability primarily depends on two principal factors: 1) its ability to obtain significant annual salary and benefit reductions through wage, work rule and benefit changes; and 2) together with a freeze of the Company's defined benefit plans, legislative reform of existing pension funding requirements that would provide the Company sufficient time to make up the current funding shortfall in those plans, which approximates $3.8 billion.
The Company is currently in mediated labor negotiations under Section 6 of the Railway Labor Act with AMFA, the IAM and PFAA and has also had discussions with ALPA. The failure to obtain labor cost restructuring will force the Company to consider other alternatives, including Chapter 11. The recent spike in fuel prices (which have topped $60 per barrel) has accelerated the need for the Company to obtain labor cost savings.
In addition to labor cost restructuring, the Company must also obtain pension reform. The estimated cash contributions to the Company's defined benefit plans for calendar years 2006 and 2007 are expected to be approximately $800 million and $1.7 billion, respectively. The U.S. Congress is currently considering a variety of proposed pension legislation, including the Employee Pension Preservation Act of 2005 (the "Pension Preservation Act"), which was introduced in the U.S. Senate on April 20, 2005. Under the Pension Preservation Act, an airline could extend to 25 years the time during which payments can be made of any unfunded liability existing under its qualified defined benefit pension plans at the date of the airline's election to comply with the Pension Preservation Act. Such an extension of payments could occur under the Pension Preservation Act if an airline elected to freeze its qualified defined benefit pension plans. To date, no pension reform legislation has been enacted. Failure to obtain pension funding relief will also cause the Company to consider Chapter 11.
