Northwest Airlines' bonds inched up between two and five points after the airline kept its operations running following the strike by its mechanics last weekend. Its 8.975% '06 bonds were up five points to 67. These bonds were trading as low as 51 1/2 two weeks ago. Northwest's 9.875% '07 bonds were up two points to 55, while its 10% '09s were up two points to 48. Northwest's bank debt remains flat in the 96-99 range.
Between $75-100 million has traded since it appeared to investors the company would avoid bankruptcy, according to one bond trader. "The prices were down too far," he said. "People were expecting the strike would shut down the airline."
Northwest brought in replacement mechanics to take over from those that walked off the job on Aug. 20. A work slowdown the day before the strike caused Northwest to run just 91% of its flights. It has managed to run 97% of its flight schedule since then, according to a company spokesman. The airline usually runs 1,473 flights a day at this time of year.
Investors do not appear concerned the strike could seriously harm Northwest's operations. "The operational numbers were not great, but there was not a big drop off of performance," said the bond trader. He added that if the airline is not able to obtain concessions with the union, it could give permanent jobs to the replacement mechanics. He believes the price could increase further on the 10% '09 bonds. "If they can get their restructuring in line, then I think it is a good business," said the investor.
Standard & Poor's was less sanguine about the company's prospects. It placed its CCC+ rating on Northwest Airlines and its subsidiary Northwest Airlines Inc. on CreditWatch with negative implications after the collapse of the wage negotiations with the Aircraft Mechanics Fraternal Association. Philip Baggaley, credit analyst at Standard & Poor's, said the airline still needs to reach concessionary contracts, not only with the mechanics, but also with other unions before the new bankruptcy law change. The company also needs to address its $3.8 billion pension deficit. Northwest is asking its unions to agree to a freeze on its defined benefit pension plan. Baggaley said the $1.1 billion cost savings the company is seeking may not be enough because of rising fuel prices. "If they can get that amount of cost saving they probably have a 50/50 chance of avoiding bankruptcy," he said.
Walter Morales, president and cio of Commonwealth Advisors, said bankruptcy is inevitable for the company because of its high cost structure. "They are managing to get through the strike well. But their cost structure needs to improve," he said. "I think there is no other solution for them but to go into bankruptcy and reorganize."