Even a deal with mechanics might not keep NWA out of Chapter 11

Joshua Freed

Monday, Aug. 15, 2005 | 11:52 a.m.

MINNEAPOLIS -- Looming right behind the question of whether Northwest Airlines Corp. mechanics will strike this week is another: Has the airline moved too late to avoid bankruptcy?

Analysts are starting to wonder -- even assuming Northwest gets the $1.1 billion in cuts it wants from its unions.

Northwest lost more money in its last quarter alone than it proposes to save from mechanics each year. It faces hundreds of millions of dollars in pension payments next year. And jet fuel remains stubbornly expensive.

"We think the risk of bankruptcy is too high to continue to hold the stock," Standard & Poors analyst James Corridore wrote in a research note advising investors to sell.

He's not swayed by Northwest's $2.1 billion in cash.

"They've got what seems like a pretty high amount of cash, but a lot of that is dedicated to funding operating losses, or pending debt maturities," he said in an interview.

Most of the nation's older carriers are struggling. United Airlines and U.S. Airways Group Inc. are in Chapter 11. Northwest and Delta Air Lines Inc. have both said they may be forced into bankruptcy, too. Northwest has said it needs those worker pay cuts and changes in pension law to stay out of Chapter 11. Under the current law, it would need to contribute $800 million to its pension in 2006 and $1.7 billion in 2007.

Airline consultant Alan Sbarra of San Francisco said bankruptcy is the quickest path toward a major restructuring. Northwest has tried to avoid that.

"It seems very, very difficult to do, especially if you don't have the cooperation of labor," he said.

Delta has also tried to avoid bankruptcy, "and they're finally admitting that they're going to have to look at bankruptcy," he said. "It's a last resort, but it's also the only option in a lot of ways these days."

With bankruptcy, timing matters. The bankruptcy law becomes more restrictive on Oct. 17 -- the new law will make it harder to pay bonuses to managers to keep them at the company, and will generally force companies to either exit bankruptcy or liquidate faster.

Delta has declined to say whether those changes figure into its bankruptcy planning. Northwest CEO Doug Steenland has said that it is one of many factors.

Some employees have speculated that Northwest wants to file for bankruptcy so it can impose terms on union workers. But Steenland has said repeatedly that the airline loses more than it gains in bankruptcy -- and it's not cheap, for one thing.