=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/c/a/2005/08/24/BUGGSEBVC1= 1.DTL --------------------------------------------------------------------- Wednesday, August 24, 2005 (SF Chronicle) NEWS ANALYSIS/Keeping hopes aloft/Chapter 11 looms over Northwest Airlines = strike David Armstrong, Chronicle Staff Writer While the mechanics' strike at Northwest Airlines is dominating the headlines, airline experts say a larger issue may loom on the horizon for Northwest and a least one other troubled carrier: Chapter 11 bankruptcy protection. There is no consensus on whether Northwest and debt-laden Delta Air Lines will file for bankruptcy protection, but some observers say it's possible that one or both carriers could file soon. Any filings, industry observers say, are likely to come before Oct. 17, when more-restrictive bankruptcy laws go into effect. Northwest, based in Minnesota, is the nation's fourth-largest airline. It is seeking at least $1.1 billion a year in wage and benefit concessions from its unions, including $176 million from the Aircraft Mechanics Fraternal Association, whose members walked off the job Saturday. So, far, the carrier, which says it has been losing $4 million a day, has obtained a $300 million give-back pact with its pilots. Atlanta's Delta, the nation's third-largest carrier, has lost $10 billion since 2001 and is $20 billion in debt. It, too, is seeking big givebacks from its largely nonunion workforce. Last week, Delta invoked a bankruptcy clause in its labor agreement with pilots, who have already agreed to benefit and pay cuts of $1 billion a year. The bankruptcy clause could lead to more concessions from the pilots and other workers in an effort to avoid filing for bankruptcy. Even under bankruptcy protection, the airlines would have to cut costs deeply enough to cover the fast-escalating cost of fuel. Crude oil has been selling for more than $65 per barrel, complicating airline recovery plans. Northwest and Delta are also asking Washington for legislation that would enable them to make payments into their pension plans over an extended period of time and thus ease their cash-flow problems. In the meantime, Delta and Northwest, analysts say, are looking enviously at United Airlines, which has handed off its defined-benefit pension obligations to federal insurers, wrested $2.5 billion in annual concessions from unions, restructured aircraft leasing and purchasing agreements and otherwise streamlined operations since it filed for Chapter 11 in December 2002. In effect, they say, United's lengthy stay in Chapter 11 gives the Chica= go carrier, the nation's No. 2 airline, an edge over other large carriers. Major U.S. airlines have collectively lost nearly $40 billion since the economic slump of 2000-03 and the Sept.11 terrorist attacks. In addition to raising the prospects of filing for Chapter 11, heavy losses have sparked speculation that one or more major carriers could liquidate or merge. Terry Trippler, an airline expert for www.cheapseats.com, said the most likely scenario would be a merger of Delta and Northwest. "That would combine the carrier with the most transatlantic routes (Delta) and a carrier with great Pacific routes (Northwest)," Trippler said, though a merger would face antitrust scrutiny. The dire airline business climate, combined with United's perceived advantage, may be pushing major airlines closer to Chapter 11, despite the drawbacks of filing for bankruptcy. "No one wants to have a bunch of outsiders telling you how to run your business," said Henry Hardeveldt, principal analyst at Forrester Research in San Francisco. Additionally, he said, "Chapter 11 is expensive, it's complicated, and it kills your equity-holders' stakes." Even so, analysts say, the opportunity to petition a Bankruptcy Court judge for permission to radically restructure in the current turbulent business environment of sky-high oil prices, heavy debt and pension loads and relatively low fares may tempt carriers that don't want to haggle separately with unions, creditors, vendors and others. As things stand, major carriers like Northwest and Delta "are being squeezed from below by low-cost carriers (such as Southwest Airlines and JetBlue Airways) and from above by United," said Kevin Mitchell, director of the Business Travel Coalition. "I expect it's 80 percent likely that Delta will file before Oct. 17. Northwest has to assess what happens in the coming weeks. It's a 50-50 chance that Northwest will file." Meanwhile, Northwest has its hands full trying to keep flight delays and cancellations to a minimum as the strike by 4,400 Northwest mechanics, aircraft cleaners and custodians represented by the mechanics union went into its fourth day. Northwest continued flying, with maintenance by 1,500 replacement workers hired and trained during the past 18 months and 400 outside contractors. A report on www.JoeSentMe.com, a Web site run by Joe Brancatelli, a form= er editor of Frequent Flyer magazine, that said only 37.5 percent of Northwest's flights arrived on time Monday. Brancatelli said he took a random sample of 99 U.S. and Canadian flights from Northwest's Web site, www.nwa.com, and tracked their progress. Northwest criticized the sampling as unscientific because it was random instead of inclusive, and said weather and other factors contribute to delays, not just maintenance problems, as its critics charge. Northwest said Tuesday that it completed 96.9 percent of its flights Monday, up from 91 percent on Friday. Trippler said that accounted only for cancellations, not delays. Northwest runs 13 daily departures from San Francisco International Airport, including a flight to Tokyo. SFO spokesman Michael McCarron reported no substantial delays on Tuesday. Union officials say it's only a matter of time before Northwest, which adopted a pared-back early-autumn schedule a week early in anticipation of the strike, will run into serious mechanical difficulties. Airline spokesmen say the replacement workers, most of whom worked at other airlines before the industry downturn led to widespread layoffs, can keep the planes flying safely. Northwest said Monday that it expects to cancel about 400 flights in the first week of the strike, 4 percent of its total. It canceled 125 flights this week last year. The carrier said it is operating 1,473 flights each weekday. If the strike proves to be a long one, the key question for Northwest wi= ll be: "How do they handle customers, not just how many flights do they operate?" said Forrester Research's Hardeveldt. "When travelers are inconvenienced, how does it accommodate them, and how does it keep their loyalty?" Meanwhile, as the strike plays out, the clock is ticking on Chapter 11. E-mail David Armstrong at davidarmstrong@xxxxxxxxxxxxxxxx --------------= -------------------------------------------------------- Copyright 2005 SF Chronicle