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Feature

Several model plans on a map.

Since 2001, the U.S. airline industry has lost $23 billion.

Keeping the birds of steel flying

By Pauline Oo

Published on July 7, 2005

With rumors of bankruptcy and a strike swirling in the air, it's no wonder that Doug Steenland drew a crowd. On Tuesday afternoon, more than 200 people and numerous reporters gathered in the McNamara Alumni Center on the Twin Cities campus to hear what the Northwest Airlines president and chief executive had to say about the challenges his company and other U.S. airlines are encountering. The occasion was the Carlson School of Management's First Tuesday Luncheon.

Northwest Airlines, the nation's fourth-largest airline based in Eagan, Minnesota, has made many headlines since the year unfolded. It reported $450 million in losses the first quarter of 2005, its stock prices are declining, its fuel costs are rising, it asked its labor unions to freeze their current pension programs in lieu of new contribution plans, it is attempting to cut annual labor costs by $1.1 billion, and on July 1 the union representing its mechanics authorized a strike vote.

"We're committed to weathering the storm and restructuring the company [to resolve those challenges]," said Steenland. He cited 9/11, the major stock market declines between 2000 and 2002, the war in Iraq, SARS, and recent sky-rocketing jet fuel costs as reasons behind the nail-biting scenarios that Northwest, and the airline industry in general, is facing. The U.S. airline industry has reportedly lost $23 billion since 2001.

To keep afloat, avoid Chapter 11 bankruptcy protection filing, or get out of bankruptcy, most of the major airlines have shed jobs, cut pay, and looked for new ways to get more money from passengers, such as charging for snacks and more substantial meals. United Airlines has been in Chapter 11 since late 2002, US Airways is in its second bankruptcy since 2002, American Airlines had a close brush with bankruptcy in early 2003, Continental made trips through bankruptcy in 1983 and 1990, and if Northwest is unsuccessful in realizing its $1.1 billion labor cost restructuring by the end of 2005, "we might have to consider the Chapter 11 bankruptcy option," said Steenland at a meet-the-press session following the luncheon. But he added that bankruptcy "is not the preferred choice and is not our first option."

"The consumer is the winner... traveling at fares at historic low points," said Steenland.

Although the airline industry is at a "pivotal point of history," Steenland said airline companies would continue to invest in the future. The key, he added, is for them to balance efficiency, productivity, and meeting the customer's needs. "The consumer is the winner... traveling at fares at historic low points." Low-cost or discount carriers, such as Southwest, JetBlue, and AirTran, are setting the cost of airfares, said Steenland. "We [major carriers] follow them."

Also, "our customers are telling us that what they value more and more is price," he said. "They make decisions based on price, especially our leisure travelers, and they are wiling to trade inconvenience for lower fares." Steenland mentioned Internet travel sites (which tend to rank airlines based on lowest airfare) and jet fuel (currently surging above $60 a barrel, with every $1 increase per barrel costing Northwest $50 million a year) as other factors affecting how Northwest and its peers decide their fluctuating airfares.

On June 10, Northwest announced a $50-each-way fare increase on fares that had been capped at $499, and United, Continental, and US Airways all matched it. However, three days later Northwest dropped the fare hike when neither Delta nor American would match it and the other airlines began backing down. Northwest also rescinded a $5 to $10 fare increase on tickets that competed with discount competitors and a two-night minimum stay for some fares.

The luncheon ended with a series of questions from the audience, running the gamut from customer experience to airline security. One self-confessed Northwest frequent flyer boldly asked if he should sell his once-$30-valued Northwest shares or if now was a good time to buy more Northwest shares. Steenland replied, "You're going to have to make a judgment on that."

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