Many airlines have faced difficult times after deregulation, and the problems were exacerbated by the downturn in air travel after 9-11. Smaller airlines like Northwest Airlines have had even more problems, and yet Northwest in particular persists and so far has voided going out of business in spite of a series of threats, including poor traveler performance, lowered expectations in business terms, labor problems, and so on.
Before deregulation in the 1970s, many had speculated as to how it would affect the structure of the airline industry, and the prevailing view was that deregulation would lead to a substantial consolidation of the industry, leaving some four to six large systems, each centered around one of the major prederegulation trunks. It was believed, for example, that American Airlines, Delta Airlines, Northwest Airlines, United Airlines, and TWA would be among the survivors because of financial strength or protected international franchises. It was felt that new and larger dominant firms in the industry would be organized around these survivors. Mergers and consolidations were expected to be a major factor, and some did indeed occur (Meyer and Oster, 1981 p. 39).
A report was issued by the Brookings Institution within a few years to see what had happened. The Report also raised the question of the future of commuter airlines under deregulation. Opponents of deregulation had argued that it would lead to severe losses in service to small communities and to a reduction in airline workers’ wages. However, the Report found that this had not occurred (Morrison and Winston, 1986, p. 2). Before deregulation, many had speculated as to how it would affect the structure of the airline industry, and the prevailing view was that deregulation would lead to a substantial consolidation of the industry, leaving some four to six large systems, each centered around one of the major prederegulation trunks. It was believed, for example, that American Airlines, Delta Airlines, Northwest Airlines, United Airlines, and TWA would be among the survivors because of financial strength or protected international franchises. It was felt that new and larger dominant firms in the industry would be organized around these survivors. Mergers and consolidations were expected to be a major factor, and some did indeed occur. Four years after deregulation, the trunk airlines were not only not dominant as a group, but they had lost 11 points of market share to other types of airlines (5.1 to former intrastate and new entrant jets, 1.0 to commuter airlines, and 4.9 to the local service carriers) (Meyer and Oster, 1981, p. 39). Over the next few years, as the smaller and more marginal operations disintegrated, American, United, Delta, and Northwest Airlines moved to buy up the best parts of the smaller companies and their routes, thus consolidating the industry further (Castro, 1991, p. 49).
More recently, the fortunes of Northwest Airlines have declined: “In September 2005, in an industry plagued by debt and rising oil prices, Northwest filed for Chapter 11 bankruptcy protection, reporting debts of some $17 billion. The company vowed to continue operations while it restructured” (Northwest Airlines Corporation, 2006, para. 1). Among the reasons given for this problem were a deepening economic recession, an increase in oil prices, and a strike by Northwest mechanics. The airline had tried to forestall such an eventuality by cutting $1 billion in labor costs, demanding some $35 million in pay, benefit, and job cuts from its nonunion workers. The airline then asked the labor unions for more concessions.
In 2004, Northwest had angered the travel industry by trying to offset $180 million in booking fees by levying a $7.50 fee per round-trip ticket and a $3.25 fee per one-way ticket. Travel agents called this the equivalent of a fare hike and threatened to sop booking Northwest flights. A booking group brought suit, and while Northwest brought a countersuit, the airline also rescinded the fees. The airline made another attempt to raise fares in 2005, but this was overturned when competing airlines would not match Northwest’s prices:
Chairman Gary Wilson responded to Northwest’s troubles by dumping 59% of his shares in the company, valued at $15.1 million, causing stock price to dive 12% amid rumors of impending bankruptcy. Desperate for cost savings and effectively unable to increase rates, the airline instituted a $50 per person fee (capped at $200 per family) for employees and eligible family members who wished to participate in the airline’s longstanding employee benefit, “pass travel,” free travel in empty seats available at flight time (Northwest Airlines Corporation, 2006, para. 35).
The most recent financials for the company are as follows:
December 2005 Sales (mil.)
1-Year Sales Growth
2005 Net Income (mil.)
1-Year Employee Growth (Northwest Airlines Corporation, Hoovers Online, 2006).
On November 30, 2006, Northwest Airlines Corporation filed its monthly operating statement for the period from October 1, 2006 through October 31, 2006 with the United States Bankruptcy Court for the Southern District of New York, and one report states,
The Company believes that the material risks and uncertainties that could affect the outlook of an airline operating under Chapter 11 and in a global economy include, among others, the ability of the Company to continue as a going concern, the ability of the Company to obtain and maintain any necessary financing for operations and other purposes, the ability of the Company to maintain adequate liquidity, the ability of the Company to absorb escalating fuel costs… (Form 8-K for Northwest Airlines Corp, 2006, para. 2).
A number of other potential hazards are listed and detailing the problems faced by the airline at the present time.
Moylan (2005) believes that Northwest can weather its bankruptcy filing and notes that Continental and America West managed to do so, though TWA, Pan Am, Eastern, and Braniff did not. Bankruptcy is likely to give Northwest relief on its pension and labor costs. Northwest says it wanted to solve its labor cost and pension without declaring bankruptcy but was unable to do so. Bankruptcy is a last resort because it can create ill will and place the company in more jeopardy, and also because it is expensive and further means a loss of management control. Under Chapter 11, the company’s decisions are influenced by a committee of creditors who have as their primary interest recovering what is owed to them, not the ongoing health of the business. Bankruptcy freezes all prebankruptcy debts and interest payments, and the company has to pay all current expenses with current revenue. The hope is that the airline will be able to lower expenses, allowing it to cut fares, build market share, and attract passengers fro other airlines. Repairing the situation will take time and cannot be rushed. One element that could still hurt the company is bad relations with employees, but the company also has a number of strengths, including a strong hold on heartland markets and valuable Pacific operations. If any other company had to step forward and replace Northwest operations, the task would be daunting.
The situation facing Northwest is not that different than what other airlines are facing after deregulation and after the business problems brought about by the 9-11 attacks, the time spent not fling, and the expenses involved in new security regulations. Airlines are all facing difficult times and trying to bring customers back, and the airlines were facing problems even before that problem occurred. Northwest should be able to survive bankruptcy, but it will still face the task of building a stronger service for the future.
Castro, Janice, ‘Get ‘Em While They Last,” Time (July 22, 1991), p. 49.
Form 8-K for Northwest Airlines Corp. (2006). Yahoo Finance. Retrieved December 10, 2006 at http://biz.yahoo.com/e/061130/nwacq.pk8-k.html.
Meyer, John R., Clinton V. Oster, Jr., Ivor P. Morgan, Benjamin A. Berman, Diana L. Strassman. Airline Deregulation: The Early Experience. Boston, Mass.: Auburn House, 1981.
Morrison, S. & Winston, C. (1986). The Economic Effects of Airline Deregulation. Washington, D.C.: The Brookings Institution.
Moylan, M. (2005, September 13). Northwest’s strengths should help it survive. http://www.highbeam.com/Search.aspx?q=northwest+airlines+bankruptcy%20publication:%5b%22Duluth%20News%20Tribune%22%5dDuluth News Tribune. Retrieved December 11, 1006 at http://www.highbeam.com/doc/1K1-121f0a0000057647.html.
Northwest Airlines Corporation (2006). International Directory of Company Histories, Vol.74. St. James Press, 2006. Retrieved December 9, 2006 at http://galenet.galegroup.com/servlet/BCRC?vrsn=155&locID=longbeach&srchtp=glbc&cc=1&c=2&mode=c&ste=74&tbst=tsCM&tab=4&ccmp=Northwest+Airlines+Corp.&mst=northwest+airlines&n=25&docNum=I2501310047&bConts=13247.
Northwest Airlines Corporation (2006). Hoovers Online. Retrieved December 8, 2006 at http://www.hoovers.com/northwest-airlines/–ID__17160 — /free-co-factsheet.xhtml.
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