Bob CollinsNorthwest is, as they say, cutting capacity. That’s fewer seats, fewer flights, and maybe a shortage. How badly do you want to fly? How much are you willing to pay?
Interesting to note that NWA boss Doug Steenland is still promising to keep hubs open. And it sounds like Northwest is moving closer to charging for the first checked bag.
Here’s Steenland’s memo to his employees.
Memo to All Employees from
Doug Steenland
June 17, 2008
I wanted you to hear from me first the necessary actions we are taking in response to the continued fuel challenge. Later tonight, at the Merrill Lynch Global Transportation Conference, I will also give industry analysts an update on how Northwest Airlines is responding to the industry’s oil shock — including additional actions we must take to further reduce capacity.
I will also update them on our planned merger with Delta and why now – with the high cost of fuel – this transaction makes more sense than ever.
To put this into perspective, year-over-year for the first quarter, we have had a $445 million increase in our fuel expenses, necessitating the need for an immediate response. On the good news side, for the remainder of 2008, we have hedged 54% of our jet fuel requirements. While these hedges are important, further actions are required to stabilize our airline.
4th Quarter ’08 Capacity Reductions
In response to the extraordinary fuel cost increases, Northwest will reduce its mainline capacity (domestic and international) in the fourth quarter of 2008 by 8.5% – 9.5% versus the fourth quarter of 2007. This includes the reductions previously announced in April.
I am pleased that no domestic stations will be closed as a result of the capacity reductions. Instead, we will pare unprofitable flying while maintaining the scope and presence of our network.
We have not yet finalized the specific employee impacts related to the reduced flying, however, for the resulting headcount reductions, we will first look to voluntary separation programs such as early-outs.
Q4 ’08 Capacity (ASMs) % change vs. Q4 ’07
System mainline capacity (domestic and international) (8.5%) – (9.5%)
Domestic consolidated (includes regionals) (7%) – (8%)
System consolidated (includes regionals and international) (3%) – (4%)
Fleet reductions
As a result of the reduced capacity, Northwest is removing a combination of 14 B757s and Airbus narrowbody aircraft from the fleet.
In addition, the DC-9 fleet will be reduced from 94 aircraft at the start of 2008 to 61 aircraft (20 DC9-30s and 41 DC9-40s/50s) by year-end.
Northwest also accelerated the retirement of three freighter aircraft from its cargo operation.
Revenue Enhancements
We are also continuing to take actions to improve our revenues with added fuel surcharges, fare and fee increases. In May, we began collecting fees for two or more checked bags, and are exploring whether we match our competitors by charging for the first checked bag.
Cost Containment / Fiscal Discipline
As part of our disciplined fiscal approach, we are closely managing our capital expenditures, having reduced planned non-aircraft cap-ex spending in 2008 from $255 million planned to $150 million as our new target.
Our aircraft leases were renegotiated during our restructuring, with pre-committed financing on favorable terms for all aircraft deliveries.
Our finance team also successfully negotiated a favorable amendment to our credit terms.
Finally, due to our strict fiscal discipline and best-in-class liquidity, we recently negotiated more favorable terms to our credit card processing agreements.
The Case for the Merger is Stronger than Ever
When we first contemplated a merger with Delta, as oil was approaching $100 a barrel, we knew this was the right deal with the right partner. Now, with oil above $130 a barrel, the case for the merger is stronger than ever with its resulting synergies.
· The merger-related synergies will improve the financial ability of Northwest and Delta to meet the challenge presented by the fuel crisis and better position the combined carrier for long-term strength and profitability.
· This is a transaction that is facilitated by best-in-class cost structures; one that will create an industry-leading balance sheet in any operating environment.
· The transaction will create a worldwide, geographically balanced network – which will enhance customer preference and make the combined carrier more competitive.
· This is a merger of choice by the two strongest network carriers. With our colleagues at Delta, our transition teams have already begun planning for a smooth and rapid integration in order to promptly capture and potentially exceed the synergies projected when we announced the deal.
Looking back on the announcement of our merger with Delta, we are more confident than ever that this was the right deal at the right time. Moving forward, the combined carrier will be in the best position to compete globally — validating that this was the right transaction for our employees, customers, shareholders and the communities we serve.
As we continue the integration planning, we will keep you updated. In the meantime, thank you for continuing to run a great airline and helping to position us for a brighter future in the combined carrier.
Yours Truly,
Doug Steenland
President & CEO
