First Step on a Long RoadWhile ALPA's offer is a promising breakthrough after nine months of negotiation, it is far less than the $442 million in annual wage concessions through 2009 that Northwest management was looking for. Nonetheless, as far as first offers go, analysts are hopeful the proposal will lead to lower costs both sides can live with.
Lower Costs, Higher LeverageThough Northwest won't get everything it wants, any help on the labor front would be immediately beneficial to earnings. According to Bear Stearns research, just $200 million in cuts from pilots would put Northwest's 2005 EPS at $3.65, up from the current expectation of $2.20, which doesn't assume any labor concessions.
|The $950 Million Question |
By mid-2005, contracts with all of Northwest's major union groups will be open for negotiation. Here's a look at what Northwest is looking for, in terms of concessions, and when it can start asking for it.
|Employee Group||No. of Employees||Union||Date When Contact Is Amendable||Northwest Concessions Target|
|Pilots||5,100||Air Line Pilots Association||September 2003||$442 million|
|Mechanics||5,700||Aircraft Mechanics Fraternal Association||May 2005||$173 million|
|Flight Attendants||8,500||International Brotherhood of Teamsters||May 2005||$134 million|
|Agents||8,800||International Association of Machinists & Aerospace Workers||February 2003||$120 million|
|Equipment Service and Stock Clerks||6,000||International Association of Machinists & Aerospace Workers||February 2003||$81 million|
|Source: Northwest Airlines, Bear Stearns, TSC Research|
Very Guarded OptimismBut with pilots weighing cost cuts, Northwest has been making progress, unlike rival Delta Air Lines ( DAL), whose pilot contract does not become open for negotiations until August. And while investing in Northwest requires a stomach for risk and a lot of patience, even analysts who are increasingly pessimistic about the industry's fortunes think the company could be worth looking at.
|Cutting Costs: Four Scenarios |
In a best-case scenario, Northwest would immediately cut costs by $950 million, helping the company eke out a profit in 2004, according to Bear Stearns estimates. While this is highly unlikely, any cost cuts will have a dramatic impact on earnings.
|Scenario||Amt. of Annual Concessions||Est. Unit |
|EPS Est.||Implied Share Value in 2005*|
|Best Case Scenario||$950 million||3.78 cents||3.26 cents||$1.39||$8.89||$46-55|
|What Northwest Wants from Pilots||$442 million||4.04||3.76||-1.33||5.54||$34-37|
|The Pilots Offer||$200 million||4.19||4.04||-2.91||3.65||$26-27|
|*assumes dilution from equity share with unions. Source: Bear Stearns|