NWA: A profitable quarter, but a turbulent one

Northwest Airlines on Tuesday reported a pretax profit of $273 million in the second quarter, but that good financial news was overshadowed by questions over the airline's ability to avoid major end-of-the-month flight cancellations.

The Eagan-based carrier said it lost $25 million in revenue in June because of a high rate of cancellations at the end of the month, which it attributed to a pilot shortage, bad weather and air traffic congestion.

Northwest CEO Doug Steenland told Wall Street analysts and reporters that his priority is establishing a "long-term, stable, reliable operation."

He made that pledge after the airline acknowledged it canceled 8 percent of its flights from last Friday through Monday. The carrier had an even worse record in June, when it dropped nearly 12 percent of its flights from June 22 to 28.

The airline did not have enough pilots to fly a full schedule in those months because of what it called a high "pilot absenteeism" rate.

Consequently, Steenland said that Northwest is cutting its domestic flight schedule by 4 percent in August and reducing required flight hours for pilots who fly narrow-body planes, such as DC-9s and A319s used on domestic routes.

Yet, when asked whether there will be a spike in flight cancellations in late August, Steenland said, "We certainly hope not."

While Steenland acknowledged that pilot sick calls have been on the rise this summer, he added that he did not want to blame pilots for the increases. "Our focus is on how do we take the necessary steps to get the airline back to being reliable," he said.

Under their previous contract, pilots flew a maximum of 80 hours a month. The concessionary contract ratified last year increased that maximum to 90 hours of flight time.

Monty Montgomery, a spokesman for the Northwest branch of the Air Line Pilots Association, said: "You cannot work your pilots excessively and keep them away from their families for the vast majority of the month, and do so month after month." He added that some pilots are "worn out" and cannot fly when they are feeling the effects of cumulative fatigue. Montgomery said Northwest management did not build enough slack into the system, so the carrier was caught shorthanded at the end of flying months. Now the airline is forgoing revenue because it is forced to cut its flight capacity, a scenario the pilots union wanted to avoid by getting more pilots on the payroll months earlier, he said.

"It would behoove Mr. Steenland to realize that in a service industry such as an airline, you cannot separate customer satisfaction from employee satisfaction," Montgomery said.

Steenland said during a conference call that he's been told that the pilots are concerned about being away from home too many days a month under the new contract. In addition, he said, many pilots think that Northwest's trip scheduling is inefficient and pilots also don't want to fly 90 hours a month.

"We are in the midst of ongoing discussions with our pilots," he said, but he declined to say what personal role he is playing in formal and informal talks with union leaders. But he emphasized that he was looking for additional remedies, so Northwest could regain the confidence of customers upset by a rash of cancellations.

On the two-month anniversary of the airline's exit from bankruptcy, Steenland and Chief Financial Officer Dave Davis dissected the carrier's financial performance and condition. The airline's second quarter pretax profit of $273 million excluded reorganization items. It compared with a pretax profit of $179 million for the same quarter in 2006.

Northwest's net profit was $2.15 billion for the quarter when reorganization items were included. Earnings per share were 78 cents, just below the consensus estimate by analysts of 79 cents.

Northwest's quarterly operating revenue dropped 3.3 percent to $3.18 billion, while its operating expenses fell by 5.7 percent to $2.82 billion.

After the results were released, Ray Neidl, an airline analyst for Calyon Securities, boosted his estimate for third-quarter earnings from 74 cents a share to 90 cents a share. He adjusted the estimate based on an expectation that Northwest will collect higher revenue per seat mile in the third quarter.

But Northwest's stock price has dropped almost one-third since the carrier left bankruptcy. Shares closed at $17.43 Tuesday, down 52 cents, or 2.9 percent. Trading was heavy with a volume of 4.4 million shares.

Neidl noted that Northwest's performance in the second quarter was driven by strength in its international business. Passenger revenue was up 7.3 percent in the Asian market and up 10.7 percent in the European market.

In the third quarter, Northwest expects domestic flying to fall 4 to 5 percent, while international flying will increase 6 to 7 percent. Regional flying will be up 3 to 4 percent, and Davis said that new regional jets are being used to substitute for some flying that has been done by Northwest mainline pilots.

Liz Fedor • 612-673-7709 • lfedor@startribune.com

2nd quarter FY2007, 6/30**

2007 2006 % chg.

Revenue $3,181.0 $3,291.0 -3.3

Ops. Net* 273.0 179.0 +52.5

Extra 1,944.0 464.0 +319.0

Net/cm 2,149.0 -285.0 --

Earn/share 0.78 -3.27 --

6 months

Revenue $6,054.0 $6,181.0 -2.1

Ops. Net 373.0 50.0 --

Extra 1,551.0 -1,439.0 --

Net/cm 1,857.0 -1,389.0 --

Earn/share -15.92 --

Figures in millions except for earnings per share.

* Ops. Net is income before reorganization items. Extra is reorganization items. Net/cm is net income (loss) applicable to common stockholders

**Northwest adopted fresh-start reporting after emerging from bankruptcy. Northwest says the fresh-start reporting makes financial statements on and after June 1 not comparable to its previously issued statements. Historical results are from predecessor.