Oil costs threaten recovery at NWA

Northwest Airlines made dramatic strides toward getting itself out of the red in the first quarter of this year, but company executives cautioned Wednesday that high oil prices threaten their plan for bringing the carrier out of bankruptcy.

"When we began the restructuring process last year, we prudently planned for oil prices averaging $65 per barrel in 2006, and $60 per barrel thereafter," Neal Cohen, Northwest's chief financial officer, said in a statement accompanying the financial results.

Recently, oil prices have lingered between $70 and $75 a barrel. The "persistent record-high fuel costs," and volatility in energy markets, have created "great uncertainty around this key element of our [business] plan," Cohen said.

Northwest reported that it shaved its operating loss to $129 million in the first quarter, down from $450 million a year ago. Including the one-time charges associated with the bankruptcy process, Northwest had a $1.1 billion net loss for the quarter.

Lower labor costs accounted for part of the progress in operations, but Northwest also said that it produced gains on the revenue side. The airline had a 1 percent increase in passenger revenue -- reaching about $2 billion -- even though it reduced its capacity by 12.5 percent domestically and 7 percent in its large Pacific market.

However, if fuel prices don't fall, the airline could keep posting losses, despite a wrenching round of pay cuts for its workers. The carrier is closing in on $1.4 billion in annual labor cost savings.

It's unclear what Northwest management would do to raise revenue and cut costs to ensure that it can emerge from bankruptcy in the coming months. Northwest spokesman Bill Mellon declined to speculate on the carrier's options.

But Northwest management is not expected to seek further labor concessions to compensate for fuel costs.

Bill Hochmuth, senior research analyst for Thrivent Asset Management, said fuel could be a crucial variable.

"If they miss on that estimate, it can literally destroy a reorganization plan," he said.

Northwest executives have said they would like to bring the airline out of bankruptcy by early next year, assuming new labor agreements can be worked out in the next several weeks. The company's pilots recently agreed to a new contract that extends a 23.9 percent pay cut. That's on top of a 15 percent cut that pilots took in late 2004. Some ground workers also approved a contract that gives them 11.5 percent pay cuts. Flight attendants are voting on a concessionary pact this month.

Fuel the biggest expense

Historically, labor has been the No. 1 cost for airlines, followed by fuel. In the first quarter, fuel was Northwest's biggest expense at $744 million, up 18 percent. The airline's price per gallon was up 36 percent to $1.87, but Northwest kept its total fuel-bill increase to half that level by reducing its flight capacity by 11 percent and retiring some inefficient airplanes.

The price of fuel aside, Northwest has had some success in raising fares and maximizing revenue. The passenger revenue it collected per mile flown increased to 10.75 cents, up 15.5 percent during the quarter.

Hochmuth said Northwest showed "solid increases" in passenger yield and unit revenue.

Fuel hedges that were in place at Southwest Airlines for years, keeping its costs low, have been expiring. As a result, Southwest is feeling the bite of higher oil prices. Low-fare airlines have been raising fares, which allowed Northwest to raise its prices.

Vaughn Cordle, chief analyst for Airline Forecasts, said high fuel prices might force some consolidation in the industry. Northwest, now the world's fifth-largest airline, could become a player in that consolidation, he said.

"Hypothetically speaking, KLM-Air France may be interested in investing in a merged Northwest-Delta in the future," Cordle said.

Darryl Jenkins, a veteran aviation consultant, said he believes fuel prices will continue to be the dominant issue for airlines. Fares have been rising, but airlines' ability to sustain that trend "could be coming to an end" because passengers will eventually resist ever-higher fares, Jenkins said.

"The effects of oil prices now are worse than the effect of 9/11 on the industry long-term," he said.

Liz Fedor • 612-673-7709