CORPORATE
PARTICIPANTS
Andrew
Lacko
Northwest
Airlines Corporation - IR
Doug
Steenland
Northwest
Airlines Corporation - CEO
Dave
Davis
Northwest
Airlines Corporation - CFO
Tim
Griffin
Northwest
Airlines Corporation - EVP, Marketing & Distribution
Neal
Cohen
Northwest
Airlines Corporation - EVP, Strategy & International
CONFERENCE CALL
PARTICIPANTS
William
Green
Morgan
Stanley - Analyst
Ray
Neidl
Calyon
Securities - Analyst
Mike
Linenberg
Merrill
Lynch - Analyst
Gary
Chase
Lehman
Brothers - Analyst
Jamie
Baker
JPMorgan
- Analyst
Frank
Baroch
Bear
Stearns - Analyst
Dan
MacKenzie
Credit
Suisse - Analyst
Bill
Nastoria
Broadpoint
Capital - Analyst
Liz
Bedore
Minneapolis
Star Tribune - Media
Josh
Freed
Associated
Press - Media
Unidentified
Participant
street.com
- Media
PRESENTATION
Operator
Ladies
and gentlemen, thank you for standing by and welcome to the Northwest Airlines
first quarter 2008 financial results conference call. During the presentation,
all participants will be in a listen-only mode. Afterwards we will conduct a
question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this
conference is being recorded Wednesday, April 23, 2008. It's now my pleasure to
turn the call over to Mr. Andrew Lacko, Director of Investor Relations. Please
go ahead, sir.
Andrew
Lacko - Northwest Airlines
Corporation - IR
Thank
you, Don. Good morning, everyone. I would like to thank you for joining us today
for Northwest Airlines first quarter 2008 financial results conference call.
Joining me are Doug Steenland, President and Chief Executive Officer, Dave
Davis, Executive Vice President and Chief Financial Officer, Neal Cohen,
Executive Vice President, Strategy, International and CEO of Regional Carriers,
and Tim Griffin, Executive Vice President, Marketing and Distribution. In
today's call, Doug will provide opening remarks followed by Dave, who will
review the quarter's results and provide forward guidance.
After our
prepared remarks, we will open up the call for questions from the analyst
community, followed by questions from the media. During the course of our
remarks today, we may make forward-looking statements and you should understand
that actual results might differ materially from those projected in our
forward-looking statements. Additional information concerning factors that could
cause actual results to materially differ from those forward-looking statements
is contained in today's press release. I would like to remind everyone that
today's call is being recorded and it is also being webcast at ir.nwa.com. A
replay of this call will be available on the same site shortly after the call
for one week. I would like now to turn the call over to Doug
Steenland.
Doug
Steenland - Northwest Airlines
Corporation - CEO
Thank
you, Andrew, and good morning, everyone. For the first quarter of 2008,
Northwest reporting a net loss of $4.1 billion. These results include a $3.9
billion noncash impairment charge to goodwill which we will describe in more
detail later in the call. The net loss in the first quarter of 2007 was $292
million. Excluding the impact of the noncash impairment charge, and losses
associated with mark-to-market out-of-period fuel hedges, our results for the
first quarter was a net loss of $191 million. This compares to a first quarter
of 2007, when Northwest reported net income of $73 million, before the impact of
reorganization charges and out-of-period fuel hedge gains. In a few moments,
Dave Davis will provide you additional color on the first quarter financial
performance which was obviously heavily impacted by a nearly 50% year-over-year
increase in fuel price.
First, I
would like to comment on the recently-announced merger between northwest and
Delta. On April 14, Northwest announced an agreement to merge with Delta to
create American's premier global airline. From the outset, we said we would
consider a transaction, only if it benefits all of our key stakeholders and we
are confident that we have met this objective. Combining the end-to-end networks
of two great airlines means that Northwest/Delta will serve more U.S.
communities and connect to more worldwide destinations than any other airline.
Our passengers will benefit from direct service from the United States to all of
the world's business centers in Asia, Latin America, Europe, Africa and North
America. Our stakeholders and our employees, in particular, will benefit from
the improved financial resilience and better competitive positioning of the
combined carrier.
The
merger is expected to generate well in excess of a conservatively estimated $1
billion in annual net synergies for more effective aircraft utilization, a more
comprehensive and diversified route system, reduced overhead, and improved
operational efficiency. The pros combination will also allow us to better
utilize the Northwest's valuable Pacific franchise, better develop the both
carriers' domestic hubs, and better match the right airplanes with the right
routes. Northwest has already integrated many aspects of its technology with
Delta through the sky team alliance, paving the way for a smooth integration
process. We expect the regulatory review process to last from six to eight
months, and anticipate closing the transaction in late 2008.
Turning
back to the first quarter, the airline's performance was significantly impacted
by the unprecedented rise in fuel prices. Northwest's average price of fuel
increased nearly $1 per gallon or 50% versus the first quarter of 2007. In
response to this increase, Northwest has undertaken a series of actions to help
mitigate the dramatic rise in fuel costs which are described in more detail in
our press release. On the passenger revenue side, Northwest has participated in
numerous fuel surcharges and fare increases to reflect the rising fuel costs. We
have attempted to implement and expand minimum-stay requirements to better
segment passenger demand. Northwest will reduce the domestic capacity in the
fall by an additional 5% versus the 2008 business plan. Northwest Cargo has
reoptimized the freighter networks which will result in the suspension of
service to several cities in Asia.
On the
cost and the liquidity side, Northwest intends to realize annualized profit
improvements in excess of $100 million through cost reduction, productivity
improvements, and revenue enhancements. We also will reduce the airlines
non-aircraft capital expenditures by $100 million for a total in 2008 of $150
million. We continue to monitor fuel prices and are preparing to take additional
action in response to the continued increases. This likely will include further
capacity reductions. Let me now update you on several key initiatives that we
have underway. First we are running a reliable airline. During the quarter,
Northwest continued to operate well.
We are
number one among domestic carriers in completion factor. Our luggage performance
remains strong and was in the top two of network carriers through February, and
we expect to maintain that position through the end of the first quarter and
into the second quarter. With respect to customer satisfaction, Northwest was
ranked number one among network carriers in the recently released 18th Annual
National Airline Quality Rating Study. The AQR study is viewed as an industry
standard, and provides consumer and industry watchers and means to compare
quality among airlines, using objective performance data on 15 elements
important to consumers when judging the quality of airline
service.
We
continued our profitability enhancing refleeting. NWA's 76-regional jet fleet
grew in the first quarter with the delivery of six Bombardier CRJ 900s, and
eight EMB 175s, bringing the airline's total to 19 CRJ 900s 17 EMB 175s. By the
end of 2008, Northwest's 76-seat regional jet fleet will include 36 EMB 175s and
36 Bombardier CRJ 900s. As the North American launch customer for the Boeing
787, we remain confident that the 787 will be a game changer and will allow us
to increase the profitability of and grow our international network. The recent
announcements related to the delay of the 787 production, we now expect to
receive our first delivery in the fourth quarter of 2009. Importantly, recently
Northwest received tentative approvement from the U.S. Department of
Transportation on its application for six-way anti-trust immunity with our sky
team alliance partners, Delta, Air France, KLM, Alitalia, and CSA Czech. Final
approval is expected to file after D.O.T. reviews the final round of the
comments to it's show-close order. After that finalization, we will look to
implement the immunity powers that the order grants to us. With that, I would
now like to turn the call over to Dave Davis.
Dave
Davis - Northwest Airlines
Corporation - CFO
Thank
you, Doug. Excluding noncash impairment charges and losses associated with
marking-to-market out-of-period fuel hedges, Northwest reported a first quarter
net loss of $191 million versus the first quarter of 2007, when the airline
reported net income of $73 million before the impact of reorganization items and
out-of-period fuel hedge gains. The goodwill impairment charge taken in the
current quarter is the result of complying with GAAP which requires to us test
for goodwill impairment annually, or when significant events occur that could be
an indicator of Northwest's value. Upon emergence from bankruptcy in May of
2007, Northwest adopted fresh start reporting as required by GAAP which required
the Company to mark-to-market all of its assets and liabilities. The excess of
enterprise value over fair value of net assets was assigned to goodwill.
Northwest's enterprise at the time of emergence was based on an analysis by the
Company's financial advisors and incorporated then current economic conditions
and fuel prices.
In a more
recent evaluation of goodwill, the Company considered the value of our equity
implied by the announced merger with Delta, current fuel prices, and economic
conditions, and other factors. The implied value of goodwill resulting from this
analysis, required a $3.9-billion write-down from the value calculated at the
time of merger. I want to reiterate that this accounting impairment is a noncash
expense. There's no impact on our liquidity or financial flexibility. No impact
on any of our financial covenants and no effect on our operations. While the
adjustment does reflect a decline in our stock price, it does not represent
management's view of intrinsic view of the Company or the potential strategic
operating and financial benefits of our announced merger.
Our
quarterly earnings were impacted by the implementation of fresh start accounting
which is detailed in the financial statements. Also, the acquisition of Mesaba
in April of 2007 affects the comparison of year-over-year results for certain
PNL line items. These changes were also detailed in the footnotes to the
financial statements of our press release. We ended the quarter well within
compliance of the covenants in our loan agreements. Let me turn to the revenue
and RASM. Operating revenues for the quarter were $3.1 billion, up 8.8% from
last year. Consolidated ASMs increased 2% year-over-year. Northwest's
consolidated RASM growth of 5%, excluding the impact of fresh start reporting,
reflects continued strong demand in yield. Normalizing for a 3.3% growth in
stage length, consolidated RASM would have increased by an additional 1.3 points
to 6.3%.
Moving to
our revenue performance by region, our year-over-year RASM changes, excluding
fresh start accounting impacts were as follows. Our domestic mainline RASM was
up 2.3% on 3.6% viewer ASMs. Our domesticated consolidated RASM with regionals
was up 4.6% on 0.9% more ASMs. Our year-over-year regional RASM improved by 3.1%
on 34.9% more ASMs which demonstrates the effectiveness of 76 regional jets in
our domestic network. Our Pacific RASM increased a strong 11% on 2.4% fewer
ASMs, primarily driven by reduced capacity in our beach markets with the
introduction of A330 aircraft, replacing 747 200s. Atlantic RASM decreased 1.5%
on a 16.4% increase in ASMs. Increased capacity in the Atlantic was driven by
the annualization of new 757 transAtlantic service in conjunction with our joint
venture partner KLM.
Turning
to cargo, cargo revenues were $198 million --- of $198 million were $9 million
or 4.8% favorable for the quarter on a 0.2% increase in cargo ton miles. Cargo
revenue per ton mile increased 4.1% year-over-year. Additionally, we continued
to rationalize freighter capacity which led to a significant increase in
year-over-year freighter unit revenues. Moving to costs. First quarter operating
expenses of $3.2 billion, excluding impairment charges, were up $574 million or
21.5% year-over-year, as a result of a $445-million increase in year-over-year
fuel expense. Excluding fuel costs and impairment charges, operating expenses
were up by $129 million year-over-year. Our mainline unit costs, excluding fuel
and nonrecurring items, were up 4.5% versus last year which is consistent with
previous guidance. The year-over-year unit cost growth was as a result of
reduced mainline capacity as well as the continued impact of noncash
emergence-related items, and year-over-year timing of maintenance checks.
Excluding these two items, our year-over-year CASM growth was approximately
1%.
Fuel
continues to be Northwest's single largest cost, representing 38% of the
Company's first quarter operating expenses, excluding impairment charges. During
the quarter, excluding taxes and losses associated with marking-to-market
out-of-period fuel hedges, we paid an average of $2.70 per gallon which was a
49.7% increase versus last year. Northwest had previously hedged approximately
45% of its fuel exposure for the quarter and realized $19 million in value from
settled fuel hedge contracts during Q1. Moving out of the balance sheet, we
ended first quarter with $3.2 billion in unrestricted cash an increase of
approximately $200 million from year-end, and $484 million in restricted cash.
At the end of the quarter, our unrestricted cash as a percentage of trailing 12
months revenue was 25.2% which continues to be the strongest among network
carriers. Our total debt at the end of the first quarter was $9.5 billion,
including the present value of off-balance sheet aircraft leases. Our net debt
at the end of the quarter was $6.3 billion.
Let me
update you briefly on the status of share distributions. Following the
distribution of over 8 million shares during first week of April, we have
approximately 244 million shares issued, including 208 million shares to
unsecured creditors with a total of $7.9 billion in allowed claims and 28
million shares that were issued pursuant to the rights offering we completed
upon exiting bankruptcy. Currently, the Company has 700 million of remaining
disputed unsecured claims to be resolved. Based on the current status of the
claims resolution process, our estimate of ultimate allowed unsecured claims
remains between 8 and $8.4 billion. The next periodic distribution is scheduled
for July 1 of 2008.
Moving
now to guidance. In the second quarter of 2008, we expect system mainline
capacity to be flat to down 1%, with domestic mainline capacity down 7 to 8%,
and international capacity up 9 to 10%. Regional capacity will be up 45 to 50%
as the 76-seaters continue to be delivered. Domestic consolidated capacity will
be down approximately 0.5% and system consolidated capacity will be up 3 to 4%.
For the full year, our system mainline capacity will be down 1 to 2%, with the
domestic mainline capacity down 7.5 to 8.5%, and international up 8 to 9%.
Regional capacity will be at 50 to 55%, due to the continued growth and
annualization of 76-seat regional jet flying, resulting in domestic consolidated
ASMs down approximately 4% and system consolidated ASMs up 2%. In light of the
current fuel environment, we are continuing to view our capacity to determine if
future reductions are warranted.
Regarding
CapEx, we expect 2008 aircraft capital spending to be approximately $1.2 billion
and non-aircraft capital spending to be $150 million or less which is consistent
with the previous guidance we provided. Regarding cost guidance for 2008, we
expect our full-year mainline CASM, excluding fuel will be up 2 to 3% on a 1 to
2% reduction in mainline ASMs. For those that model Northwest on a consolidated
basis, we expect full-year 2008 consolidated CASM ex-fuel, to be up 1 to 2%
versus 2007. We expect our second quarter mainline CASM ex-fuel will be up 5 to
6% on flat to 1% fewer ASMs, largely as a result of the continued impact of the
noncash emergence-related items in the first half of 2008.
High fuel
prices continue to be a challenge for Northwest and the industry. Based on the
forward curve, as of April 21, our second quarter 2008 fuel price would be $3.43
per gallon, excluding taxes and our full-year 2008 fuel price would be $3.22 per
gallon, also excluding taxes. It remains difficult to forecast future period
prices given the current volatility in the future's market. For the remainer of
the year, we've hedged approximately 24% of our second quarter fuel
requirements, 21% of our third quarter requirements, and 46% of our fourth
quarter requirements. As of April 21, the value of our open-hedge positions for
the remainer of 2008 was approximately $115 million. With that, let me open it
up for questions.
QUESTION AND ANSWER
Operator
Thank
you. Ladies and gentlemen, we'll now consume with the analyst portion of the
question-and-answer session. (OPERATOR INSTRUCTIONS) Please stand by for the
first question. Our first question comes from the line of William Green from
Morgan Stanley. Please proceed.
William
Green - Morgan Stanley -
Analyst
Doug, I'm
wondering if you could talk a little bit about the ATI opportunity with the
joint venture, because you guys have always had some pretty good success with
the KLM. I think it's even been measured if at least the high hundreds of
millions, if not even higher than that. When you get together as a four-way,
what's the incremental opportunity there? I assume that's not in the synergy
number for the merger, but just double checking.
Doug
Steenland - Northwest Airlines
Corporation - CEO
I think
there's a very, very conservative estimate in the revenue synergy numbers as to
the benefit coming from ATI cooperation over the transAtlantic. I think Bill,
the real opportunity there is to, in essence take, what we now have which is an
extremely successful Northwest/KLM joint venture that has industry-leading
results over the transAtlantic in an emerging Delta/Air France joint venture.
And really have what --- probably at the end of the day, post the closing of our
transaction would be a two-way JV between the merged carrier on this side of the
Atlantic and the Air France, KLM entity on the other side. I think there's
substantial upside potential from that, and I know that the team will
aggressively look to develop that. In the interim, assuming that there is a
finalization of the ATI decision at the D.O.T. in the next 30 days, we -- why we
will both proceed with the negotiation of that expanded joint venture, we'll
have the immunity powers available to us. I think we will look to use them to
develop a more competitive network to do some potential rationalization, and to
make some decisions in this fuel environment that would be better for all that
might be more difficult if the ATI was not available.
William
Green - Morgan Stanley -
Analyst
Is it
safe to say that the kind of scale you will get with this ATI, you would have
ail similar kind of scale benefit from it? Or would it not be one plus one is
more than two?
Doug
Steenland - Northwest Airlines
Corporation - CEO
I think
there will clearly be some scale benefit that comes from it. If the final -- it
will be -- it will be a result of the negotiation to see what that final joint
venture looks like. Obviously, I think a goal will be to try to realize the kind
of margins and the kind of returns that Northwest/KLM realize over the
transAtlantic today.
William
Green - Morgan Stanley -
Analyst
Okay. And
then Dave, on costs, it seemed to me -- and maybe my expectations were not set
correctly, but it seemed to me that the first quarter cost performance was not
as good as I had expected at least. I'm curious -- it's not clear to me how is
you're cutting capacity, you'll be able to get these cost guidance numbers that
you put out there? You talked about the $100-million in savings, but what are
some of the things that you're going to be able to cut?
Dave
Davis - Northwest Airlines
Corporation - CFO
First of
all, in referring to first quarter, the 4.5% CASM increase was in line with our
previous guidance. As a said, one piece of that -- the biggest piece was some
emergence-related noncash expenses that are going to continue to hit us in the
first and the second quarter. And then, there was simply timing of some
maintenance checks. Actually, those two times, the first quarter CASM was up
only 1% year-over-year. Once we lap by the third quarter of 2008, these noncash
emergence-related items, the year-over-year comps will look
better.
Doug
Steenland - Northwest Airlines
Corporation - CEO
I also
think that --- this is Doug. I also think you can expect, particularly in this
fuel-related environment, that we will be very aggressive and very focused with
respect to making sure that we do get costs out, related to the capacity
reductions that we anticipate and to make sure that we operate as absolutely
efficiently as we can. We take full advantage and benefit of the restructuring
opportunities that came about during the check or loan
process.
William
Green - Morgan Stanley -
Analyst
All
right. Thanks for your help.
Operator
Our next
question comes from the line of Ray Neidl with Calyon Securities. Please
proceed.
Ray
Neidl - Calyon Securities -
Analyst
Yes. With
the potential merger with Delta coming, I was just wondering if you heard
anything from the Japanese government with your extensive routes into or out of
Narita Airport? There are no concerns about losing some of that ability? Or is
that grandfathered in?
Doug
Steenland - Northwest Airlines
Corporation - CEO
There are
no concerns, Ray, and we are highly confidence that the transfers that will --
the transaction will require are ministerial in nature and will be --- will
occur and will occur in the time frame that will permit the transaction to close
by year-end.
Ray
Neidl - Calyon Securities -
Analyst
Okay. And
your freight operation, your pure freighter operation across the Pacific, I know
you were looking at its possible future. Is that endangered now with the Delta
merger?
Doug
Steenland - Northwest Airlines
Corporation - CEO
Well, I
think one of the -- one of the issues that Northwest will face, and that the
merged entity will face, is a strategic decision going forward with respect to
the size and the structure of these -- of the freighter business. No decisions
have been made on that, and that's a decision to be made subsequently. I think
in this fuel environment, though, we've made some changes to the freighter side
of the house to make sure that it's being operated in this environment as
efficiently and as cost effectively as possible. That's caused us to basically
park three airplanes and to discontinue service to a number of Asian
cities.
Ray
Neidl - Calyon Securities -
Analyst
And your
aircraft orders and your fleet plan going forward, is that on hold now pending
the merger?
Doug
Steenland - Northwest Airlines
Corporation - CEO
No. The
aircraft orders that we have will continue to take delivery of the remaining
76-seat regional jets. We would like to take delivery -- we were scheduled to
take delivery of our 787s, starting August of this year. Obviously, we are very
disappointed by the deferrals in that delivery schedule, but the 18 firm and 15
optioned airplanes that Northwest ordered in 2005 remain a key piece of the
long-term strategic future of Northwest and the merged entity. There's every
intent to take every one of those 18 airplanes because they will in fact, be
game changers and they will contribute to a material improvement in the
profitability of the airline.
Ray
Neidl - Calyon Securities -
Analyst
Good.
Thank you.
Operator
Our next
question comes from the line of Mike Linenberg with Merrill Lynch. Please
proceed.
Mike
Linenberg - Merrill Lynch -
Analyst
Yes, just
a question on your RASM. If I look at your consolidated domestic RASM, it looked
like even after the stage length adjustment, it looked like you lagged the
industry a bit, even with the decent capacity coming out. Is that --- what is
behind that? Is it more short haul in nature? Are you seeing weakness coming
from the Detroit market, given what has happened there with businesses? Any
color would be great. Thanks.
Doug
Steenland - Northwest Airlines
Corporation - CEO
Tim,
would you like to take a shot at that?
Tim
Griffin - Northwest Airlines
Corporation - EVP, Marketing & Distribution
Yes.
Mike, fairly broad and consistent across our network. A little bit of weakness
in Memphis, relative to the other two hubs. Primarily, from some competitive
[encouragence]. A key one which has already exited. We will see some restoration
of those numbers moving forward, which we are already seeing in
Q2.
Mike
Linenberg - Merrill Lynch -
Analyst
Okay.
Good. And then, just actually a second question for Tim. Tim, when you look at
how capacity is coming down and the loads are still running pretty high, are you
seeing any changes in the booking curve ? Or the time in which people book? Are
the curves getting either longer? Also, comments on some of the fences that seem
to be going back into the fare structure, which I think is a good thing. Any
commentary on that would be
Tim
Griffin - Northwest Airlines
Corporation - EVP, Marketing & Distribution
Yes. As
fuel continues to skyrocket, everybody is searching for revenue. Segmentation in
any business, when you can separate two groups who have different demand
elasticities and charge different prices, produces more revenue. There's nothing
different about the airline business than any other business. We have long been
a proponent of segmentation. Just in the last few days, we filed in a
significant number of markets, restoration of the Saturday night stay, and
that's drawing some competitive support really. I would like to see that in
place for Northwest revenue. Booking profiles, not changing radically. Customers
are -- for the summer buying out a little bit earlier. We have really been
carefully managing our yields. Yields or very strong for the summer that we
booked so far. And we have the brakes on a little bit, on taking bookings
because demand is so strong. With all the other news in the -- about the economy
and all --- we have all antenna up and are looking for any signs of downturn,
and quite frankly, haven't seen it. Some few isolated pockets on the corporate
side where people might be under pressure themselves and taking a reduction in
their travel budgets. But that seems to be being offset largely by others,
particularly venturing out internationally with a very weak dollar, doing more
global selling and pushing. Overall demand, really quite strong for all the
tidbits of bad news that are out in the economic world.
Mike
Linenberg - Merrill Lynch -
Analyst
Great,
Tim. Thanks for the detailed answer.
Dave
Davis - Northwest Airlines
Corporation - CFO
Mike,
Mike, let me just add for the -- to hedge our bets on the other side of the
summer, which we -- as Tim pointed out, we expect to be strong. Our domestic
mainline capacity in Q4 is expected to be 12.6% less than what it was in Q4 of
'07. I think that will have a very positive impact on domestic
RASM.
Mike
Linenberg - Merrill Lynch -
Analyst
Great.
Thank you for the info.
Operator
Our next
question comes from the line of Gary Chase with Lehman Brothers. Please
proceed.
Gary
Chase - Lehman Brothers -
Analyst
Good
morning, guys.
Dave
Davis - Northwest Airlines
Corporation - CFO
Good
morning, Gary.
Gary
Chase - Lehman Brothers -
Analyst
Wondered
if you could just refresh us. I know that the delivery schedule on the
76-seaters is predominantly a 2008 event, if not entirely, but could you just
give us a flavor for what the run rate growth is on the regional line as we move
into 2009?
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes. The
delivery schedule is everything will be in by the end of the year. We'll have 36
aircraft in place. In terms of the run rate 2009 ASM number, Gary, I think we're
going to have to get back to you on it. I don't have that at any fingertips, but
we probably have an average of 36 to 40 aircrafts in 2008, and an average of 76
in 2009. But Andrew can get back to you on the year-over-year ASM
number.
Gary
Chase - Lehman Brothers -
Analyst
The
reason I ask that question, Dave, if you just take a 10% mainline reduction and
offset it with 55 regional growth, you get to a pretty flattish capacity
outcome, least in the third and fourth quarters of this year for consolidated
domestic. I understand that you are flying less than what your plan was because
of where you were last year. I'm trying to think through what's really
happening, and from the standpoint of actual Northwest capacity in the domestic
system. My sense is that as we move into 2009, those mainline cuts, assuming
those are run rate, they're going to start overwhelming the regional growth. I
think it's important to understand how that will shake out.
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes.
Gary, I think your read is accurate. As Doug just mentioned in the fourth
quarter our domestic mainline capacity is down 12.6%. Even with all the
76-seaters in, towards the end of the year, we will still be down on a total
domestic basis in the fourth quarter. I think your read is correct that once we
get into '09, the mainline cuts, the run rate there overwhelms the regional
increase.
Gary
Chase - Lehman Brothers -
Analyst
And that
is the intent to leave those in? In other words --
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes.
Gary
Chase - Lehman Brothers -
Analyst
Okay. I
appreciate the color.
Doug
Steenland - Northwest Airlines
Corporation - CEO
I think,
Gary, we've sort of indicated that, particularly given the recent increases over
the last couple weeks, we're going to be revisiting capacity again to see
whether additional reductions are warranted, given where fuel is. So those are
not static numbers.
Gary
Chase - Lehman Brothers -
Analyst
Understood.
Okay. Thanks, guys.
Operator
Our next
question comes from the line of Jamie Baker with JP Morgan. Please
proceed.
Jamie
Baker - JPMorgan -
Analyst
Good
morning, everybody. Quickly, Tim, just back to something you said before.
Actually suggests a difference between the airline business and other
commodities, is that your best customers have to pay the most. But your least
loyal customers pay far less. That's certainly a mute case when I'm shopping for
other products.
That's
actually not my question. The question is, I think generally speaking, most
industry executives and I don't want to put words in anybody's mouth here, but
everybody seems to be writing off the domestic market. Sell you losses there,
withdrawing capacity and so forth. Meanwhile, moving aggressively into whatever
international markets they can find. But when you look at the data for recent
recessions, and there are different ways to cut this, but it looks to me like
the international market is what typically takes the biggest hits. Can you offer
some thoughts as to why this recession might be different?
Tim
Griffin - Northwest Airlines
Corporation - EVP, Marketing & Distribution
Jamie,
this is Tim. I think the dollar weakness is an important driver of U.S. origin
international business. I think that's quite different in this this recession. I
think in this recession since the last one, I think the world has globalized
even more. Just a comment on your non-question comment, that you started with,
you're buying a different product than some of our leisure customers. We provide
convenience for you and save seats through our yield management system for you,
so that they will be there at the last minute when you decide to go
somewhere.
Jamie
Baker - JPMorgan -
Analyst
Yes. No,
I would agree with that, Tim. I wasn't trying to call you out on that. I just
heard your response, I think to Michael's question, the difference between your
models and others. I appreciate the extra leg room and not having to pay for a
window seat, for example. Anything other than dollar weakness that would
contribute to your apparent international optimism?
Tim
Griffin - Northwest Airlines
Corporation - EVP, Marketing & Distribution
One other
point, Jamie, I would add, as a result of our joint venture, we have -- we
clearly benefit from the KLM distribution system in Europe.
Jamie
Baker - JPMorgan -
Analyst
Okay
Tim
Griffin - Northwest Airlines
Corporation - EVP, Marketing & Distribution
European
travel to the United States, given the Euro/dollar exchange is very reasonable
these days. We're able to toggle that back and forth to make sure that we
capture what the optimal mix is from the different points of
sale.
Jamie
Baker - JPMorgan -
Analyst
All
right. Those are very helpful points. Thank you very much.
Operator
And our
next question comes from the line of Frank Boroch of Bear Stearns. Please
proceed.
Frank
Baroch - Bear Stearns -
Analyst
Thank
you. Good morning. Tim, maybe you could shed some light on what you are seeing
in the Pacific region. I know in the first quarter, the unit revenue remained
robust. Some of your Asian competitors have recently noted a weakening demand on
the transbacker. Are you guys seeing anything like that?
Tim
Griffin - Northwest Airlines
Corporation - EVP, Marketing & Distribution
That's
really a Neal bailiwick, so let me turn to him.
Frank
Baroch - Bear Stearns -
Analyst
Okay.
Neal
Cohen - Northwest Airlines
Corporation - EVP, Strategy & International
What we
saw in the first quarter in the Pacific, we saw an 11-point RASM improvement
year-over-year which as Dave and Doug covered, very strong. Totally in line with
Tim's comments earlier. The business travel to Asia, we are seeing just
tremendous strength there. The business class market place, U.S. origin traffic
to Asia, as U.S. companies look to export more, and -- so that traffic we see a
lot of strength. On the leisure side, we definitely don't see quite as much
strength, but we have a very, very modest capacity plan. We were down 2.5% in
the first quarter in Asia. We have a plan of keeping our capacity in Asia well
sort of in line with supply and demand. Take advantage of the opportunity to
improve our RASM in that market and market our products to our core heartland
customer which frankly is where we see a lot of strength in the market
today.
Frank
Baroch - Bear Stearns -
Analyst
Okay.
Great. And maybe this is for Dave. I think the last couple of years, you had
talked about the expected P&L improvement from the 76 RJs, are relative to
the DC-9s. In this current fuel environment, I think before it was about a 16
percentage point op margin improvement. Is that tracking a lot higher than that?
Are you happy with that performance? I would think with fuel, the improvement
would be quite a bit better now.
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes. Yes.
The comment I make on that is this, from revenue and cost perspective, the 76
seaters have been performing exactly as planned. We are very, very pleased with
how they are working in our network. Obviously with fuel costs substantially
higher than they were when we did the analysis to decide to purchase the
76-seaters, the benefit coming from these aircraft is even greater than we had
initially anticipated.
Frank
Baroch - Bear Stearns -
Analyst
Okay.
Then lastly, can you remind us, have you guys filed the HSR paperwork yet? I saw
some comment in a meeting.
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes, we
have.
Frank
Baroch - Bear Stearns -
Analyst
Okay.
Thank you.
Operator
Our next
question comes from the line of Dan MacKenzie with Credit Suisse. Please
proceed.
Dan
MacKenzie - Credit Suisse -
Analyst
Hi. Good
morning. Thanks. It looks like there's going to be a lot of spare RJs looking
ahead this year, presumably pretty cheap. I guess I'm wondering, does that
create an opportunity to park more DC-9s or backfill even with more regional
jets than you already planned to schedule?
Doug
Steenland - Northwest Airlines
Corporation - CEO
This is
Doug. I think the --- as our --- certainly as our domestic capacity comes down,
a lot of it is coming down in the form of retirement of DC-9s. And so at the
moment, we have no plans for bringing additional 50-seat
CRJs.
Frank
Baroch - Bear Stearns -
Analyst
I see.
Okay. And then, Tim, I appreciate the comments earlier about revenues and
capacity. I just would like to come at it from a slightly different angle. When
you think about demand destruction from fare increases versus demand destruction
from general economic weakness, which is generally a more dominant phenomenon or
a bigger worry from your perspective?
Tim
Griffin - Northwest Airlines
Corporation - EVP, Marketing & Distribution
I think I
would probably worry more about the general conditions. The resistance to price
is something we can monitor with our customers and adapt to it. We see changes
in behavior and we modify prices. Sometimes in certain short haul markets that
get a standard across the board flat dollar increase, time and time again, you
look down and the price can be too high in a market like that. You see customer
resistance where revenue is actually lower. All higher prices don't produce
higher revenue, and you can adjust to that. More macro endogenous factors I
worry about more, because there's not a lot I can do about recession, other than
react to it.
Frank
Baroch - Bear Stearns -
Analyst
Right.
Okay. All right. Thank you.
Operator
And,
ladies and gentlemen, the following question will conclude the analysts portion
of the question-and-answer session. We'll proceed with the media for the next
question. (OPERATOR INSTRUCTIONS) The final analyst question comes from the line
of [Bill Nastoria] with [Broadpoint Capital]. Please proceed.
Bill
Nastoria - Broadpoint Capital
- Analyst
Thank
you. Dave, I'm going to ask you the same question that I asked Delta. Are there
any change of control provisions in any one of your aircraft notes? That would
include obviously, both the untouched AATCs, as well as some of the structured
AATCs.
Dave
Davis - Northwest Airlines
Corporation - CFO
The
answer to that is no.
Bill
Nastoria - Broadpoint Capital
- Analyst
I assume
that you are fully funded for all '08 aircraft deliveries. Would that be
correct?
Dave
Davis - Northwest Airlines
Corporation - CFO
When you
say fully funded, do you mean fully financed?
Bill
Nastoria - Broadpoint Capital
- Analyst
Yes.
Fully financed. I'm sorry.
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes, we
have financing in place for all of our upcoming aircraft deliveries. That's
correct.
Bill
Nastoria - Broadpoint Capital
- Analyst
Okay. And
finally, have you thought about when you actually close the transaction with
Delta, what is going to happen to the bank debt agreement? Are you going to
refinance it from your end? Or is that going to go away all together on --- what
are the plans? I know it's a little bit early. But I'm just wondering, any color
you could provide there would be very helpful.
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes. I
think it's premature to discuss that. We are looking at that
now.
Bill
Nastoria - Broadpoint Capital
- Analyst
Okay. And
then finally -- or I should say one more question, and that is on --- any status
with the Northwest Airlines pilots on just where you are with them. That would
be, of course, greatly appreciated.
Doug
Steenland - Northwest Airlines
Corporation - CEO
This is
Doug, Bill. I hope you noted yesterday, there was a joint communication between
the Northwest pilots and the Delta pilots. It talked about a process to reach a
single combined collective bargaining agreement to be followed then by a
seniority integration. We have committed and the combined entity has committed
to look to use our best efforts to resolve those issues prior to closing, which
would be a first in the industry. That was a positive communication and there
will be follow-up associated with it.
Bill
Nastoria - Broadpoint Capital
- Analyst
Okay.
Thank you.
Operator
Our next
question comes from the line of Liz Bedore with Minneapolis Star Tribune. Please
proceed.
Liz
Bedore - Minneapolis Star
Tribune - Media
Good
morning. If you are aware, Delta also released their results this morning. Both
Northwest and Delta had very large goodwill write-downs. In response to that, I
received a question from a reader who said, are both Northwest and Delta taking
those impairment charges earlier than required in order to build a political
case for their merger? That's maybe a question for Doug and/or
Dave.
Dave
Davis - Northwest Airlines
Corporation - CFO
I will
answer that, Liz. The answer is no. We are governed by GAAP accounting
principles. We deal with our external auditors on issues like this. There are
clear -- clearly laid out standards for how one looks at whether an impairment
is necessary and when one looks at that. When there's a significant external
event, such as the announcement of the merger, under the accounting guidance,
that triggers the necessity to look at whether an impairment is necessary or
not.
That
really drove the timing. There's no discretion with respect to that. And when
our team -- our Northwest team and our external auditors looked at it,
particularly given the impact that oil price run-ups have had, it drove the
answer that an impairment was, in fact, required. We used our best efforts to
estimate what that was and that's the $3.9 billion that we had announced. There
was really no discretion here. There was no effort to do this in advance. We
basically followed the accounting book and this is the result that that
produced.
Liz
Bedore - Minneapolis Star
Tribune - Media
One brief
follow-up, and that is, in the Delta call, Richard Anderson indicated that as
Northwest and Delta will work on the transition plan, that some of the cost
efficiencies, some of the synergies may actually increase beyond the original
estimates. I was just interested in your thinking on that,
Doug.
Doug
Steenland - Northwest Airlines
Corporation - CEO
We would
clearly concur in that. I think we were, as I said earlier, I think we were
conservative in the estimates of the synergies. And as I think, as the process
goes forward and gets more detailed and granular, I'm highly confident that that
number will increase.
Liz
Bedore - Minneapolis Star
Tribune - Media
Thank
you, Doug.
Operator
Our next
question comes from the line of Josh Freed with the Associated Press. Please
proceed.
Josh
Freed - Associated Press -
Media
Good
morning. You said you complied -- that you are in compliance now with your
lending covenants. Do any of those covenants include any type of share price
trigger?
Dave
Davis - Northwest Airlines
Corporation - CFO
No, they
don't.
Josh
Freed - Associated Press -
Media
Okay. On
the fuel hedging, could you say a little more about -- I don't know -- maybe an
average price that you have locked in at this point? Or what the effects would
be for you to -- the benefits or the down sides of the hedges depending on fuel
price behavior over the rest of the year?
Dave
Davis - Northwest Airlines
Corporation - CFO
Well,
we've said that our existing fuel hedges are based on the current forward curve,
are worth about $115 million. Our hedges are largely in the form of collars
where we have put in place ceilings,so that if the price of fuel is in excess of
the ceiling, we only pay the ceiling price. And so that 115 reflects the dollar
amounts to which today the forward curve would drive prices over the ceilings
that we put in place on our -- on the collars that we have arranged
for.
Josh
Freed - Associated Press -
Media
All
right. Thank you.
Operator
Our next
question comes from the line with (inaudible) street.com.
Unidentified
Participant - street.com -
Media
Two
things. Dave, is it possible to give a net income per share number after the
impairment?
Dave
Davis - Northwest Airlines
Corporation - CFO
It is
possible. I don't have it at my fingertips. We can calculate while we sit here.
It should be, excluding our impairment charges, it's $191 million divided by our
share count of $262 million, so you can do that math.
Unidentified
Participant - street.com -
Media
All
right. Let me ask something else while you are doing that. I want to ask about
Narita. Access to Narita is limited. In the merger, you would have to take out
some of your existing flights in order to fly to Atlanta and Kennedy; is that
correct?
Neal
Cohen - Northwest Airlines
Corporation - EVP, Strategy & International
Well, we
have -- Northwest has the second -- excuse me, the second largest slot portfolio
in Narita. Those slots are used for flights from the U.S. to Japan. They are
used from flights from Japan to other Asian cities, and they are used by our
cargo operation. They are also used by flights from Japan to the resort markets
of Hawaii, Guam, Saipan. The answer is, there would have to be a reallocation of
those slots to the extent that additional Narita capacity was --- new Narita
flights were proposed. That would be done on a traditional ranking basis where
--- to the extent that the new flights were going to be better performers. One
would look at what's then at the bottom of the list and decide what changes
would need to be made. And no decisions have been made, needless to say, because
that will not occur until post-closing. Things can and will change inevitably
between now and then.
Unidentified
Participant - street.com -
Media
But that
is the one of the principal benefits of this merger to use those Delta, those
powerful Delta hubs to access Narita. Correct?
Neal
Cohen - Northwest Airlines
Corporation - EVP, Strategy & International
Yes, I
think we have acknowledged that, given our smaller domestic base here in the
United States where 7% domestic player. That the Pacific assets would be better
utilized by having a larger domestic base that can be the basis for U.S. origin
flights to Japan.
Unidentified
Participant - street.com -
Media
All
right. Thank you. I will wait for the other answer. Thank you very
much.
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes. I
mean, excluding, the noncash impairment charges, we would have had a $0.78 per
share loss.
Unidentified
Participant - street.com -
Media
$0.78 per
share. All right. Thank you.
Operator
There
appears to be no further questions at this time.
Doug
Steenland - Northwest Airlines
Corporation - CEO
Great.
Thank you very much.
Dave
Davis - Northwest Airlines
Corporation - CFO
Thank you
very much.
Operator
And
ladies and gentlemen, that does conclude the conference call for today. We thank
you for your participation, and ask you that you please disconnect your
lines.
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