Despite record oil prices that reached $147 a barrel, Northwest Airlines expects to make between $60 million and $100 million in the third quarter, driven by fare increases, fuel-price hedges and new luggage fees.
"In this fuel environment, we are happy to contemplate some profitability," Dave Davis, Northwest's chief financial officer, said Thursday at an investment conference in New York.
Northwest's greater pricing power is crucial in the carrier's quest to turn a profit in the quarter that closes at the end of this month. In late August, it made a major reduction in its domestic flight capacity, which allowed Northwest to charge ticket prices that more often cover its costs. In response to skyrocketing fuel prices and a softening U.S. economy, Northwest and other big airlines have been shrinking operations.
In Northwest's case, domestic flights operated by its pilots were slashed by 10 to 11 percent in the third quarter. They will fall by 18 to 19 percent in the fourth quarter compared with a year earlier.
Unit revenue on Northwest's domestic flights -- flown by its pilots and regional partners -- shot up 9 to 11 percent in the third quarter. Davis said Thursday that the increase jumped 18 to 20 percent in September, when the full effects of the schedule cutbacks were in place.
By mid-September, Northwest also was collecting almost $500,000 a day on new checked-bag fees. Many of its consumers now must pay $15 to check a first bag and $25 for a second bag each way. Revenue from bag fees is steadily growing as they begin to affect more passengers. Davis reported that it was $370,000 on Aug. 31 and reached $493,000 by Sept. 14.
He predicted that checked bag fees will generate $150 million to $200 million a year for Northwest.
A year ago, Northwest produced a pretax profit of $405 million in the third quarter, when its expense for jet fuel averaged $2.11 a gallon. This year, Northwest had hedges in place for 71 percent of its fuel supply in the third quarter. Davis said the price Northwest is paying this month is $3.67 a gallon.
He estimated that Northwest will pay about $3.31 a gallon for fuel in the fourth quarter, when 67.9 percent of its fuel is hedged.
"The strong financial performance anticipated for the third quarter is the result of smart fuel hedges, increased revenue from fees, industry-leading operating performance and very disciplined cost containment across the company," said Northwest spokeswoman Tammy Lee Stanoch.
As Northwest reduces its capacity, it is not simply parking airplanes.
Davis said that the carrier is selling 10 Boeing 757s and four Airbus A320s as part of its capacity cuts in the fourth quarter.
"We're talking to a number of parties, most of them international," Davis said, but he didn't reveal the potential buyers or how much Northwest hopes to be paid for the aircraft.
Davis and Delta President Ed Bastian both said at the conference that they expect the airlines' merger to be approved in the fourth quarter.
Bastian said that Delta is increasing its international business by 15 percent in the current quarter but is cutting its domestic seats by 12 percent in the quarter.
He projected that Delta will "break even" or turn in a "modest loss" in the third quarter.
He emphasized that Delta increased its operating revenue by 10 percent in the second quarter, and had good cost controls.
After Delta acquires Northwest and achieves $2 billion in annual cost and revenue benefits, he said, the new Delta's financial performance will be so strong that it will separate itself from the rest of the industry.
Liz Fedor • 612-673-7709
