Northwest Airlines ( NWAC) continues to post deep losses, but a recent breakthrough in negotiating wage cuts from unionized pilots could stop the bleeding -- and provide significant upside to shares if a deal can be reached in 2004.

Northwest's pilots, represented by the Air Line Pilots Association, on Friday offered $200 million in annual concessions over the next two years, which is less than half of what Northwest has said it needs. In exchange for pay cuts, Northwest's pilots want a stake in the company, and while terms haven't been announced, negotiations are moving in the right direction, unlike the situation at Delta Air Lines ( DAL), where an executive exodus has left labor talks at a standstill.

"I think $200 million is not enough, but it's a start," said Helane Becker, airline analyst at The Benchmark Company, a New York-based brokerage. "At this point everything is negotiable. And I think the ownership stake is the only way to go if a deal gets done. It's not like they haven't done this before." The pilots' employee stock ownership plan "owns a chunk of the company," she said.

Indeed, after a bitter strike in the fall of 1998, when the industry's prospects were much brighter, pilots signed a four-year contract that gave them a 12% raise -- and a sizable stake in the company. But more than five years after management and labor were at each other's throats, both seem to understand they're in the same boat -- and it is a very leaky one.

"It is clear that they share our view of the need for labor cost restructuring. We are scheduled to meet around the end of the month to receive their proposal that will reduce our pilot costs," said Northwest's management, on a conference call discussing first-quarter results. "Our pilots have targeted completion of the negotiation by this fall."

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