Northwest Airlines: This stock still won't fly for me
Q: How will the resolution of the mechanics strike at Northwest Airlines affect the stock (NWACQ)?
A: Thousands of mechanics and cleaners went on strike against Northwest Airlines in August 2005. The 15-month strike ended Nov. 6 after the union accepted a settlement offered by the airline. The conflict was the result of the struggling airline seeking 25% cuts in wages.
The settlement is regarded by some as a victory for the airline, which was able to keep flying during the strike. The strikers not only accepted the settlement, but they are faced with a difficult decision of either quitting and taking 10 weeks' severance pay or going on a recall list.
The airlines' ability to cut employee-related costs has been a recurring theme in the recovery of several struggling carriers. Following the Sept. 11 terrorist attacks, several found themselves in dire positions. They filed for bankruptcy protection and were able to reduce salaries for workers. That's given the bankrupts a lower cost structure in many cases, allowing them to compete and even beat fares of so-called discount airlines.
Lower costs have also meant improving financials and stock prices. At Northwest, for instance, the company reported an operating profit of $1.4 billion in the September quarter, reversing an operating loss of $167 million in the same period a year ago. And the stock in mid-November jumped from 98 cents a share to more than $3 a share Monday. That's pretty good if you consider during the same time the Standard & Poor's 500 rose 6% and discount airline Southwest's shares have fallen slightly.
But does that mean you should buy the stock? Probably not. To make a sweeping generalization, airlines have largely been disappointing investments. Even legendary billionaire investor Warren Buffett avoids investing in them, according to The Warren Buffett Way by Robert Hagstrom.
In addition, Northwest's stock was delisted from the Nasdaq exchange when it filed for bankruptcy. It now trades on the highly unregulated Pink Sheets market. While this recovery might be real, there are other investments that will probably work out much better.
