Northwest Seeks to Save $2.5B, Void Labor Contracts

CHICAGO – Northwest Airlines Corp. (search) on Wednesday said it has asked a bankruptcy judge for permission to void its labor contracts if its employee unions do not agree to concessions worth $1.4 billion a year.

The annual labor reductions would be part of $2.5 billion in overall savings the No. 4 U.S. airline would seek through steps including the return of passenger jets with leases that are too expensive, Northwest said in a statement.

"We must quickly reduce our labor costs by $1.4 billion annually," Northwest's Chief Executive Doug Steenland said in a statement. "Our court motion gives union leaders and Northwest management time to reach the necessary agreements, before the court would be compelled to intervene and impose new contracts."

Most of the U.S airline industry has been battered by weak revenue and soaring fuel costs. Northwest and No. 3 U.S. carrier Delta Air Lines Inc. (DAL) filed for bankruptcy protection in September.

"Northwest has been losing a fair amount of money for a while now," said Standard & Poor's analyst Philip Baggaley. "I expect they feel they need to move forward quickly on these cost savings given where fuel prices are and going into the weak winter season."

Companies in bankruptcy can use court protection as leverage to extract savings from their labor forces that otherwise might be unattainable. Unions at UAL Corp's (search) bankrupt United Airlines, for example, agreed to wage and benefit concessions this year after the carrier asked for court permission to void its labor contracts.

Northwest also said it plans to freeze its defined benefit plan and implement a cheaper defined contribution plan that would take effect when the airline exits bankruptcy. Northwest now faces unfunded pension liabilities of about $3.8 billion, of which almost $3 billion is due between 2005 and 2007.

Will Holman, spokesman for the Air Line Pilots Association (search), said Northwest's action was expected and the union is hopeful of reaching a consensual deal with Northwest.

"We viewed it as a matter of when, not if," Holman said. Northwest has asked the pilots for $358 million in savings in addition to earlier concessions.

In a court filing, Northwest complained that its labor costs are the highest in the industry, putting the carrier at a distinct competitive disadvantage.

The company said such expenses have contributed to losses that will exceed $1 billion for the first nine months of 2005.

"Time has run out. Northwest must achieve competitive labor costs quickly or it too faces the prospect of failure," the carrier said in the filing.

Northwest has already managed to achieve some of its labor cost savings by replacing its 4,400 striking mechanics and related staff with cheaper workers and outside vendors.

The mechanics represented by the Aircraft Mechanics Fraternal Association have been on strike since August after failing to agree on a contract with Northwest. AMFA said its negotiating committee would meet with Northwest's management on Thursday to discuss the status of their dispute and to see if open issues could be resolved.

The carrier said its salaried and management employees also would take a second round of pay and benefits reductions in the near future.

Another cost-savings measure would be cutting the late fall schedule. Along with previously announced reductions, Northwest anticipates that its fourth-quarter system mainline capacity would be down 7 percent to 8 percent from a year earlier.

Northwest said it would cut domestic mainline capacity by 9 percent to 10 percent and international mainline capacity by 4 percent to 5 percent.

The company is planning additional schedule reductions beginning in January. The airline said it expects its first-quarter 2006 system mainline capacity to be down 11 percent to 13 percent. Eventually, the Northwest mainline flight schedule could be reduced by as much as 15 percent or more, the carrier said.