nwa_425.htm
Filed by
Northwest Airlines Corporation
Pursuant
to Rule 425 under the
Securities
Act of 1933 and deemed filed
pursuant
to Rule 14a-12 under the
Securities
Exchange Act of 1934
Subject
Company: Northwest Airlines Corporation
Commission
File No.: 1-15285
Forward-looking
Statements
This
information includes “forward-looking statements” within the meaning of the safe
harbor provisions of the United States Private Securities Litigation Reform Act
of 1995. Words such as “expect,’ “estimate,” “project,” “budget,”
“forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,”
“believes,” “predicts,” “potential,” “continue,” and similar expressions are
intended to identify such forward-looking statements. These
forward-looking statements include, without limitation, Delta's and Northwest’s
expectations with respect to the synergies, costs and charges and
capitalization, anticipated financial impacts of the merger transaction and
related transactions; approval of the merger transaction and related
transactions by shareholders; the satisfaction of the closing conditions to the
merger transaction and related transactions; and the timing of the completion of
the merger transaction and related transactions.
These
forward-looking statements involve significant risks and uncertainties that
could cause the actual results to differ materially from the expected results.
Most of these factors are outside our control and difficult to
predict. Factors that may cause such differences include, but are not
limited to, the possibility that the expected synergies will not be realized, or
will not be realized within the expected time period, due to, among other
things, (1) the airline pricing environment; (2) competitive actions taken by
other airlines; (3) general economic conditions; (4) changes in jet fuel prices;
(5) actions taken or conditions imposed by the United States and foreign
governments; (6) the willingness of customers to travel; (7) difficulties in
integrating the operations of the two airlines; (8) the impact of labor
relations, and (9) fluctuations in foreign currency exchange
rates. Other factors include the possibility that the merger does not
close, including due to the failure to receive required stockholder or
regulatory approvals, or the failure of other closing conditions.
Delta
and Northwest caution that the foregoing list of factors is not exclusive.
Additional information concerning these and other risk factors is contained in
Delta’s and Northwest’s most recently filed Forms 10-K. All
subsequent written and oral forward-looking statements concerning Delta,
Northwest, the merger, the related transactions or other matters and
attributable to Delta or Northwest or any person acting on their behalf are
expressly qualified in their entirety by the cautionary statements above. Delta
and Northwest do not undertake any obligation to update any forward-looking
statement, whether written or oral, relating to the matters discussed in this
news release.
Additional
Information About the Merger and Where to Find It
In
connection with the proposed merger, Delta filed with the Securities and
Exchange Commission (“SEC”) a Registration Statement on Form S-4 that includes a
preliminary joint proxy statement of Delta and Northwest that also constitutes a
prospectus of Delta. At the appropriate time, Delta and Northwest will
mail the final joint proxy statement/prospectus to their
stockholders. Delta and Northwest urge investors and security holders
to read the final joint proxy statement/prospectus regarding the proposed merger
when it becomes available because it will contain important information. You may
obtain copies of all documents filed with the SEC regarding this transaction,
free of charge, at the SEC’s website (www.sec.gov). You may also obtain these
documents, free of charge, from Delta’s website (www.delta.com) under the tab
“About Delta” and then under the heading “Investor Relations” and then under the
item “SEC Filings.” You may also obtain these documents, free of charge, from
Northwest’s website (www.nwa.com) under the tab “About Northwest” and then under
the heading “Investor Relations” and then under the item “SEC Filings and
Section 16 Filings.”
Delta,
Northwest and their respective directors, executive officers and certain other
members of management and employees may be soliciting proxies from Delta and
Northwest stockholders in favor of the merger. Information regarding the persons
who may, under the rules of the SEC, be deemed participants in the solicitation
of Delta and Northwest stockholders in connection with the proposed merger
will be set forth in the proxy statement/prospectus when it is filed with the
SEC. You can find information about Delta’s executive officers and directors in
its definitive proxy statement filed with the SEC on April 25, 2008 related to
Delta’s 2008 Annual Meeting of Stockholders. You can find information about
Northwest’s executive officers and directors in its Amendment to its Annual
Report on Form 10-K filed with the SEC on April 29, 2008. You can
obtain free copies of these documents from Delta and Northwest using the contact
information above.
|
Conference
Call Transcript
NWA
- Q2 2008 Northwest Airlines Corporation Earnings Conference
Call
Event
Date/Time: Jul. 23. 2008 / 11:00AM
ET
|
CORPORATE
PARTICIPANTS
Andrew
Roberts
Northwest
Airlines Corporation - EVP Operations
Doug
Steenland
Northwest
Airlines Corporation - CEO, President
Dave
Davis
Northwest
Airlines Corporation - CFO
Tim
Griffin
Northwest
Airlines Corporation - EVP Marketing and Distribution
Andrew
Lacko
Northwest
Airlines Corporation - Director IR
CONFERENCE
CALL PARTICIPANTS
Ray
Neidl
Calyon
Securities - Analyst
Gary
Chase
Lehman
Brothers - Analyst
Jamie
Baker
JPMorgan
- Analyst
William
Greene
Morgan
Stanley - Analyst
Daniel
McKenzie
Credit
Suisse - Analyst
PRESENTATION
Operator
Ladies
and gentlemen, thank you for standing by and welcome to the Northwest Airlines
second quarter 2008 financial results conference call. (OPERATOR INSTRUCTIONS)
As a reminder, this conference is being recorded, Wednesday, July 23, 2008. It's
now my pleasure to turn the conference over to Mr. Andrew Lacko, Director of
Investor Relations. Please go ahead.
Andrew
Lacko - Northwest Airlines
Corporation - Director IR
Thank
you, Don, and good morning everyone. I'd like to thank you for joining us today
for the Northwest Airlines second quarter 2008 financial results conference
call. Joining me today are Doug Steenland, President and Chief Executive
Officer; Dave Davis, EVP and Chief Financial Officer; Tim Griffin, EVP Marketing
and Distribution, and Andy Roberts, EVP of Operations. 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 today's call, 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 earnings press release. I
would also like to remind everyone that today's call is being recorded and is
also being webcast at ir.nwa.com. A replay of this call will be made available
on the IR section of nwa.com shortly after the call for one week. With that, I'd
like to now turn the call over to Doug Steenland.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Thank
you, Andrew, and good morning everyone. For the second quarter of 2008 Northwest
reported a net loss of $377 million, excluding the impact of non-cash impairment
charges, Northwest reported second quarter net income of 170 million. This
compares to the second quarter of 2007 when Northwest reported net income of 205
million before the impact of reorganization items. Northwest ended the second
quarter with 3.7 billion in total liquidity and today has 3.9 billion in total
liquidity as a result of recent financings. In a few moments Dave will provide
additional color on our second quarter performance which was impacted by a
nearly 70% year-over-year increase in fuel prices. First I'd like to make a few
comments.
Let's
focus first on the Northwest Delta merger. We believe the combination with Delta
makes even more sense now given the continued run up in fuel prices than it did
when we entered into the merger agreement in April. The diverse global network,
best in class cost structure, and industry leading balance sheet of the combined
carrier will create the world's premier global airline. Significant work is
already under way to make sure that the synergies created by this merger are
realized as quickly as possible. Northwest and Delta have jointly formed 26
integration planning teams comprised of leaders from both companies that are
charged with smoothly integrating operations and realizing the targeted
synergies once the merger closes. We continue to expect the closing in the
fourth quarter of 2008.
Since the
merger announcement in April, Northwest and Delta have, among other things,
announced that our respective pilot groups have reached an unprecedented pre
merger collective bargaining agreement that includes a process to achieve full
seniority list integration upon closing of the merger. This agreement will allow
for the full utilization of network and fleet synergies. It remains subject to
membership ratification which is expected to be realized in August of this year.
We've announced the key executives that will lead the combined airline after the
mergers closed. We also announced that the shareholder vote for the approval of
the merger will take place at Northwest's annual meeting on September 25. We've
updating our estimate of merger related synergies to $2 billion on an annualized
steady basis and estimated the one-time transition costs of the merger to be 600
million over a three-year period.
Turning
back to the second quarter, Northwest was able to deliver solid performance on
many fronts despite the 637 million increase in fuel cost that we experienced.
Importantly, we were able to grow top line revenue by 12.4% and consolidated
passenger revenue by 10%. Based on the most recent comparative data available,
Northwest achieved length of haul adjusted domestic (inaudible), that is 111.4%
of the industry average. We also continue to demonstrate prudent and disciplined
cost control and the airline maintains a strong liquidity position relative to
our peers. We'll continue to pursue opportunities to improve on this strong
liquidity position.
For our
customers, Northwest continues to run a very reliable airline. Year to date
through June, Northwest DOT completion factor of 99% was the best among network
carriers. In 2008, Northwest has so far achieved 15 perfect 100% completion
factor days system wide and we've had 99 -- excuse me, 19 100% completion factor
days so far in North America. For Northwest, our principal operating metric is
departure at 0 which causes all the rest of the operating performance to fall in
line and I'm pleased to say that our departure at 0 performance year to date is
among the best in the industry and the airline has posted its strongest 0
performance on record in the Atlantic and Pacific regions during the three
months of the second quarter.
Northwest
continues to lead the industry in luggage performance through May and we expect
to maintain that strong position through the end of the second quarter.
Northwest's operational performance is recognized by our customers as the
airline leads the industry in the fewest number of customer complaints in the
most recent DOT rankings for May. These strong operating results directly
reflect the hard work and dedication of our 30,000 coworkers and for that I want
to thank them for a job very well done.
The
unprecedented rise in fuel prices has had a significant adverse affect on our
second quarter financial results. The average price that we pay for jet fuel
increased by $1.41 per gallon or 69.3% versus the second quarter of 2007. In
response to that, we continue to take actions to help mitigate this dramatic
price increase. These actions include on the capacity front we've announced that
we'll reduce fourth quarter system main line capacity by 8-1/2% to 9-1/2% versus
fourth quarter 2007. These fuel price driven capacity reductions require that we
reduce overall staffing by 2500 full-time equivalents. These reductions are
being achieved, we believe, through voluntary early out programs, voluntary
leave, work rule modifications and attrition.
Consistent
with these capacity reductions we've announced that we'll remove 14 757 and
Airbus narrow body aircraft from the fleet. Additionally, on the fleet front, we
continue to take delivery of the 76-seat regional aircraft which, on average,
are approximately 30% more fuel efficient than our DC-9s. In addition to our
continued participation in industry fare actions, Northwest has matched other
carriers by introducing a fee for all checked baggage, implemented fuel-related
service fee for [rural] perks and (inaudible) tickets, and increased ticket
change fees which, in the aggregate, we estimate will drive between 250 and 300
million in annual revenue improvement. While these initiatives are expected to
have a meaningful impact on our results, additional capacity reductions and
further fare and fee actions may be required if fuel prices remain at current
levels or should they increase.
With fuel
prices at today's levels, the airline industry will continue to struggle in its
current form. It's inevitable that capacity will continue to come out either
through voluntary or involuntary means. We firmly believe that Northwest is very
well positioned to face the challenges that high fuel costs have created. Our
solid balance sheet, our competitive cost structure, our strong liquidity
position and importantly our game changing merger with Delta position Northwest
to not only survive, but to prosper in this new environment. With these opening
remarks, I'd now like to turn the call over to Dave Davis for some additional
color on the (inaudible) results. Dave.
Dave
Davis - Northwest Airlines
Corporation - CFO
Thank
you, Doug. As Doug noted, Northwest today reported a second quarter 2008 net
loss of $377 million or $1.43 per share. Excluding non-cash impairment charges,
Northwest reported second quarter net income of $170 million versus the second
quarter of 2007 when the airline reported net income of 205 million before the
impact of reorganization items. Our second quarter reported results include a
non-cash impairment charge of $547 million and market to market gains on out of
period fuel hedges of $250 million. The impairment charge relates to the
finalization of the good will impairment testing that Northwest began during the
first quarter which resulted in a $3.9 billion charge to our first quarter
earnings.
Upon
completion of the testing, it was determined that an additional net non-cash
impairment charge of $547 million was required. The charge has no impact on our
liquidity or financial covenants. Our quarterly earnings were impacted by the
implementation of fresh start accounting, which is detailed in the financial
statements. Also, the acquisition of [Musava] in April of last year affects the
comparison for year over year results for certain P&L line items. These
changes are also detailed in the footnotes to our financial statements on our
press release.
Turning
to revenue, operating revenues for the second quarter were $3.6 billion, up
12.4% from last year. Consolidated passenger revenue increased by 10% and
consolidated ASMs were up by 3.6% year over year. Northwest consolidated RASM
growth was 6.1% or 4.7% excluding the impact of fresh start
accounting.
Looking
into early fall, we see domestic book load factor up three to four points versus
last year with materially higher yields. Moving to our revenue performance by
region, our year-over-year RASM improvements, excluding fresh starting
accounting was as follows, our domestic main line RASM was up 3.5% on 6.7% fewer
ASMs and our domestic consolidated RASM with regionals was up 4.8% on 0.1% fewer
ASMs. Our year-over-year regional RASM decreased by 5.3% on 48% more ASMs. Our
Pacific RASM increased by 10.9% primarily on 0.9% fewer ASMs primarily driven by
reduced capacity in our beach markets with the introduction of A330 aircraft
replacing 747 200s. Atlantic RASM decreased 0.2% on a 28.1% increase in ASMs.
Increased capacity in the Atlantic was driven by the annualization of new
transatlantic service launched in 2007 as well as previously announced new
service additions in 2008. Cargo revenues of $212 million were up 14 million or
7.1% favorable the second quarter 2007 on a 9.1% decrease in cargo ton miles.
Cargo revenue per ton mile increased a strong 18.1% year over year. We continue
to closely monitor cargo performance to optimally match freighter capacity with
market demand.
Moving
now to costs. Second quarter operating expenses of 3.[2] billion, excluding
impairment charges, were up $504 million or 17.8% year over year as a result of
a $637 million increase in year over year fuel costs. Excluding fuel costs,
gains on out of period fuel hedges and the non-cash impairment charge, operating
expenses increased by $123 million year over year. Our main line unit costs,
excluding fuel and non-recurring items, were up 4.7% versus last year which is
favorable to our previous guidance. The year over year unit cost growth was the
result of continued impact of non-cash emergence items and merger related
expenses. Excluding these items, our year-over-year CASM growth was
approximately 1%. This modest CASM on nearly flat line ASMs is evidence of
Northwest's continued focus on prudent cost control in this high fuel
environment.
Beginning
in the third quarter, the non-cash emergence related items that have contributed
to our CASM increases throughout the year will no longer impact our
year-over-year results. Fuel continues to be Northwest's single largest cost
representing 43.7% of the company's second quarter operating expenses excluding
the non-cash impairment charge and out of period hedge gains. During the
quarter, excluding the taxes and out of period fuel hedge gains, we paid an
average of $3.45 per gallon, which was 69.3% higher than last year. Northwest
had previously hedged approximately 40% of its fuel exposure for the quarter and
we realized $43 million in value from settled fuel hedge contracts during the
quarter.
Moving
now to the balance sheet. We ended the quarter with 3.7 billion in total
liquidity of which 3.3 billion is unrestricted and 424 million is restricted
cash. The restricted cash balance continues to include a fully funded tax trust
valued at 255 million at quarter end which was originally established in 2002.
Including unrestricted cash and the value of the funded tax trust, our quarter
ending liquidity was 26.6% of trailing 12 months revenue which continues to be
among the highest in the industry. Capital expenditures during the quarter
totaled $330 million. Aircraft CapEx was 294 million of which 230 million was
offset by financing proceeds. Non-aircraft CapEx totaled 36 million during the
quarter. Also, on July 15 we closed on $183 million aircraft and spare engine
financing transaction. The cash from this financing will appear in our third
quarter ending cash balance. Our total at the end of the first quarter was $9.7
billion, including the present value of off balance sheet aircraft leases. Our
net debt at the end of the quarter was 6.4 billion and Northwest remains in full
compliance with all of our financial covenants.
Let me
now turn to guidance for the remainder of the year. Regarding third quarter
capacity, we expect the following, domestic main line to be down 10 to 11%,
international to be up 9 to 10% with system main line down 1-1/2% to 2-1/2%.
Regional capacity will be up 50% to 55% as the 76 seaters continue to be
delivered. Domestic consolidated capacity will be down 2% to 3% and system
consolidated capacity will be up 2% to 3%. Now turning to the fourth quarter of
2008, domestic main line is planned to be down 18% to 19% while international
will grow 2% to 3% and system main line capacity will be down 8-1/2% to 9-1/2%.
Regionals will be up 50% to 55%. Domestic consolidated capacity will be down 7%
to 8% and system consolidated capacity will be down 3% to 4%. Full-year capacity
guidance is included in the tables attached to this morning's press
release.
Turning
now to revenue. Given the industry's unprecedented fourth quarter capacity cuts,
it's not completely clear what the resulting unit revenue improvement will be.
However, if preliminary booking indicators continue to hold, we project fourth
quarter RASM growth to be very strong. Early indicators are that we will be able
to maintain the strong unit revenue growth we have achieved so far this year
plus RASM improvements commensurate with the planned capacity pull downs.
Regarding CapEx, we expect 2008 aircraft capital spending to be approximately
$1.2 billion with 890 million of this amount financed. Through the second
quarter, we have already spent 613 million on aircraft CapEx and received 475
million in financing proceeds. Non-aircraft capital spending is expected to be
150 million or less for the year, which is consistent with the previous guidance
we provided. Regarding cost guidance for the remainder of 2008, we expect our
third quarter main line CASM ex-fuel to be up 1.5% to 2.5% on 1.5% to 2.5% fewer
ASMs largely driven by integration expenses related to the merger. For the full
year, main line CASM excluding fuel will be up 3% to 4% on a 2-1/2% to 3-1/2%
reduction in main line ASMs. For those that model Northwest on a consolidated
basis, we expect full year 2008 consolidated CASM ex fuel to be up 2.5% to 3.5%
versus last year.
Turning
now to fuel. Based on the forward curve as of July 21, and excluding taxes and
out of period market to market fuel hedge adjustments, our third quarter 2008
fuel price would be $4.06 per gallon and full year 2008 would be $3.45 a gallon.
For the remainder of the year we've hedged approximately 63% of our third
quarter requirements, 56% of our fourth quarter requirements and 21% of our
first quarter 2009 fuel requirements. As of July 21, the cash value of
Northwest's open hedge positions for the remainder of 2008 was approximately
$190 million. With that, we are ready to take some questions.
QUESTION
AND ANSWER
Operator
Thank
you. We will now proceed with the analyst portion of the question and answer
session. (OPERATOR INSTRUCTIONS) And our first question comes from the line of
Ray Neidl with Calyon Securities. Please proceed.
Ray
Neidl - Calyon Securities -
Analyst
Good
morning, everyone.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Good
morning, Rick.
Ray
Neidl - Calyon Securities -
Analyst
Let's
see. First thing is I'm just wondering with the regional system, with the merger
coming up with Delta, do you have a plan yet for the owned airlines that
Northwest have? Will they stay in the system or will that be diversified out,
IPO'd or has that decision not been made yet?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
This is
Doug. First, the plan is that on the Northwest side, Compass and Musava will
continue to be the key parts of the network going forward. Delta owns Conair.
There have been no plans made regarding any spin out, but we do think that there
are clear cost efficiency opportunities in terms of duplicative of overhead,
back office functions and the like that the regional carriers now do that
they'll be able to economize on when they're all under one roof. So we think
that's part of the upside of the merger transaction.
Ray
Neidl - Calyon Securities -
Analyst
And your
contract carrier Pinnacle, what's their future in the combined
system?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
We have a
long-term contract with Pinnacle. They operate 124 CRJ 200s for us. For the
Northwest network, that's properly sized and that contract will -- remains in
place post closing and the expectation is that they'll continue to provide
regional lift according to the terms of that agreement. We were -- excuse me, we
restructured that agreement when we went through chapter 11, but we believe we
have very economic terms under which Pinnacle provides that lift and the
expectation is that they will continue to do so and both sides will abide by the
contractual terms.
Ray
Neidl - Calyon Securities -
Analyst
Okay.
And, Doug, being a long-time industry manager who, I guess, will be exiting the
industry pretty soon at least as an active manager, if you want, would you share
your thoughts and some of the macro developments that could be coming our way,
such as possible reregulation and environmental taxes that seem to be spreading
from Europe and what's going on with the oil future trading contracts that have
the airlines so upset?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Well, I
think on those three points, Ray, one, I think the horses are out of the barn
regarding deregulation of the industry. I think by and large the consumer over
the last -- since post 1978 have been the big huge winner here and how the
consumer fares is going forward is going to be largely dependent on the price of
fuel and the ability of the carriers to pass it through. But I think it's too
late to regulate -- to go back into the reregulation mode. I think if there's
any area of focus that might make sense is that there's an existing EAS program
to small communities. I think as a public policy matter, it's legitimate to look
at as to whether the government wants to provide some assistance to make sure
that the truly small communities in the country remain on the national air
transportation system.
As to the
environmental issues and congestion issues, I think to some extent, we need to
re-examine these all together once the industry sort of resizes itself based on
what the steady state of fuel going forward is. If you look at 10% of industry
capacity coming out I think, one, you're going to see a whole lot less
congestion in our major airports and, two, the issue of carbon production will
be less and when you factor in the billions that the industry has invested in
over the last couple of years, clearly there's been material progress in being
more efficient. The answer cannot be the unilateral action that the EEU has
taken to try to put in an emissions trading scheme. The industry will fight that
and I think at the end of the day will prevail in that regard.
As to the
overall issue of fuel, I think the airline industry supports a bipartisan
approach that addresses both the financial speculation that's taken place in the
market and efforts to address increases in supply. I think it's beyond doubt
that the trillions of dollars that have come into the commodity space on the
financial side have clearly had an impact on price. You can't see the kind of
volatile movements in price that we've seen over the last 30 or 45 days that
don't correlate to any underlying shifts in -- material shifts in supply and
demand without coming to the conclusion that clearly these inflows are having an
impact and the kind of provisions that are now pending before the Congress that
deal with position limits, that deal with other regulatory and transparency
improvements I think are warranted and Congress needs to enact on a very
expedited basis.
Ray
Neidl - Calyon Securities -
Analyst
Great.
Thank you very much for your opinions.
Operator
And our
next question comes from the line of Gary Chase with Lehman Brothers. Please
proceed.
Gary
Chase - Lehman Brothers -
Analyst
Excuse
me. Good morning, guys.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Good
morning.
Gary
Chase - Lehman Brothers -
Analyst
Just a
couple of quick for Dave and a couple for Doug. You gave the full-year
consolidated chasm number. Do you happen to have that for the third
quarter?
Dave
Davis - Northwest Airlines
Corporation - CFO
You know
what, why don't I have you follow up with Andrew on that afterwards. I don't
have that in front of me.
Gary
Chase - Lehman Brothers -
Analyst
Okay. The
190 million that you mentioned, is there any counterparty deposits on the
balance sheet right now reflected in your cash balance for the value of those
hedges?
Dave
Davis - Northwest Airlines
Corporation - CFO
There is
not.
Gary
Chase - Lehman Brothers -
Analyst
Okay.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
I'd like
-- just on that point, Gary, I'd like some of the airlines that have reported
that have included in their cash counterparty deposits, we have none and our
unrestricted cash is truly fully available to us to spend and run the airline
irrespective of what happens when the -- going forward if fuel prices go up or
down.
Gary
Chase - Lehman Brothers -
Analyst
Understood.
That's an important distinction right now. The -- Doug, I wanted to ask you just
procedurally, what's your level of confidence that the Justice Department is
going to have time to review the transaction within this administration? If you
could just give us an update on that, that will be helpful.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Our level
of confidence is very high, Gary. First, we have entered into a timing agreement
with the Justice Department that basically establishes a series of milestones
that are there for us to hit and if we hit those milestones, I think that will
then generate a decision in this calendar year out of the Justice Department. We
have hit all the milestones so far, including in our view compliance with the
second request under the Hart-Scott-Rodino statute which we have done and we
will continue to meet all the other milestones and, as a result, we're highly
confident we'll get a decision this calendar year.
Gary
Chase - Lehman Brothers -
Analyst
And
there's obviously no other airline mergers, which at one point was a concern.
There's nothing else clogging up the system that you think jeopardizes that time
table?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Well, we
obviously have the Justice Department process. We don't believe we've been
through -- we've had Congressional hearings in both the Senate and the House and
we think we fully and appropriately answered all their questions and we don't
anticipate any other sort of legislative action coming out of that arena and, as
a result, that's what produces our conclusion that we think it's -- that we
believe the transaction will close in the fourth quarter of this
year.
Gary
Chase - Lehman Brothers -
Analyst
Okay,
guys. Thanks.
Operator
And our
next question comes from the line of Jamie Baker with JPMorgan. Please
proceed.
Jamie
Baker - JPMorgan -
Analyst
Hey, good
morning, everybody.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Good
morning, Jamie.
Jamie
Baker - JPMorgan -
Analyst
Dave,
just hoping you could expand on the mechanics of the $4.05 fuel guidance for the
third quarter. The amount seems a little high to us given we're spot closed on
the 21st, particularly in light of being 63% hedged and I also missed at what
jet [care] equivalent that 63% ties to.
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes.
Jamie, it's a little complicated. It's a good question. Here is essentially the
issue. The benefit of the hedge in the sort of third and fourth quarter is
reflected in our second quarter number. We don't qualify for hedge accounting,
so that $250 million in hedge gains that I talked about, out of period hedge
gains, is really the value of the hedges out in Q3, 4 and then Q1 of 2009. So
the forward curve actually is a little bit sort of unfavorable to or more
favorable to where it was on July 21. So essentially we see a little bit of a
negative mark to market versus when we close the books on June 30 and that
negative mark to market increases the third quarter fuel price a
bit.
Jamie
Baker - JPMorgan -
Analyst
Dave
Davis - Northwest Airlines
Corporation - CFO
Yes. So
it's somewhat confusing.
Jamie
Baker - JPMorgan -
Analyst
Okay. And
as a follow-up to that and this is similar to a question we posed to United
yesterday. The fourth quarter cost guidance, which is implied on the figures you
gave on the full year, it suggests a very admirable level of expense control
given the level of shrinkage that you're planning. Could you give us some
additional color as to sort of what categories are driving this savings at a
time when the capacity cuts would logically be expected to put some more
pressure on unit economics?
Dave
Davis - Northwest Airlines
Corporation - CFO
Well,
clearly the variable costs associated with the flying going away are coming up.
We're anticipating disposing of some of the aircraft associated with the
capacity pull down, so any ownership costs associated with those are going away.
As we discussed, there is some head count reduction that we're planning, that's
both on the variable front as well as we're anticipating some fixed head count
reduction in overhead. So I would say that those are probably the largest
pieces. Just continue with the cost discipline that we've exhibited throughout
the rest of the P&L.
Gary
Chase - Lehman Brothers -
Analyst
Okay.
Thanks, so much.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Also, we
have a fair amount of the services we get come through vendors and that also
facilitates our ability to adjust to capacity on a very sort of short-term basis
because we don't necessarily have a lot of that overhead associated with that
piece of the business baked into our base. That's somebody else's overhead. And
so whether it's our outsourcing of our major maintenance requirements or whether
it's done at our vendor stations, that overhead is really proportionally off of
our books.
Dave
Davis - Northwest Airlines
Corporation - CFO
Jamie,
just let me throw out one other number as well just on this third quarter fuel
just for modeling purposes. As I said, the $4.06 is really the impact of
movements in the forward curve since June 30 and how that impacts our
accounting. That's not the cash cost that we will pay for fuel in the third
quarter. I just want to be clear. The cash cost that we will pay for fuel will
be substantially lower than that. And I think we estimated those numbers as of
the forward curve a couple of days ago at probably more like $3.80 a gallon from
a cash perspective.
Gary
Chase - Lehman Brothers -
Analyst
Okay.
That sounds a little bit more right. Thanks for that. On the topic of fuel, one
of the things we missioned on in the second quarter was the improvement in fuel
efficiency? Do you have a year-end target or better than that a 2009 target as
to what your ASMs per gallon might look like as the fleet changes around a
little bit? It might not have the kind of number you have in front of you, but
--
Dave
Davis - Northwest Airlines
Corporation - CFO
Obviously
if some of the DC9s come out and the 76 seaters are fully delivered that's going
to get better. I don't have a number.
Gary
Chase - Lehman Brothers -
Analyst
Okay.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
If you
think of it a little bit in more macro terms, Jamie, we're operating about the
same sized airline that we flew in 2000 and we're about 25% more fuel efficient
now than we were back then as a result of A330s or DC10s and 747-200s, DC-9s
being parked and the like. So over the course of time, we've become 25% more
fuel efficient as a result of the capital investment that we've been
making.
Gary
Chase - Lehman Brothers -
Analyst
Okay.
Very helpful. Thanks for taking all of our questions, guys.
Operator
And our
next question comes from the line of William Greene with Morgan Stanley. Please
proceed.
William
Greene - Morgan Stanley -
Analyst
Yes, hi.
Based on the timing of when you announced your capacity cuts, it seems that it
would probably be a safe assumption that the fuel price you were using at that
point was probably 1.25, 1.30 or so and that's kind of where we are. So I'm
curious if you think you've maybe done enough, you've addressed the near-term
challenges? Obviously if the fuel goes up, it would be a problem, but at these
levels have you done enough for 1.25, are we kind of done in that
regard?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
I'm not
sure. I think we're going to have to see how things play out in Q4. I think
we've -- and Tim might provide a little extra color here. I think we're bullish
in terms of where we think Q4 RASM is going to be, but all of this is just sort
of a guess and I think importantly we will be prepared to take additional
capacity actions if we don't see the kind of -- because ultimately we need to
get in the black, right? And if this doesn't do it, we'll be prepared to take
more. You want to talk a little bit about where you think Q4
--
Tim
Griffin - Northwest Airlines
Corporation - EVP Marketing and Distribution
Yes. I
think that's exactly right, Doug. We are fairly bullish on what we see for
September through December after we get past the summer, the early returns on --
take the domestic front which has been under the most stress, the book loads are
up, yields are way up, book RASM is up appreciably. Obviously as the booking
curves have changed a little bit, we'll give some of that back. But as Dave
mentioned in his prepared remarks, we really see a world where healthy RASM
improvements kind of working off the base that we've enjoyed thus far plus the
added benefit from the significant industry reductions, we've had a chance to
kind of model those cuts and we think Northwest fares very well in benefiting
from those industry cuts. Coupled with significant improvements in other revenue
on the change fee side, luggage fee, award fees and the like, we're optimistic
on the total revenue front, all of which doesn't necessarily get captured in
yield. But with that as caution, we'll continue to obviously watch and see where
fuel goes and see how our competitors react in the fall.
William
Greene - Morgan Stanley -
Analyst
And, Tim,
how -- how material will the Beijing Olympics be to the third quarter
results?
Tim
Griffin - Northwest Airlines
Corporation - EVP Marketing and Distribution
Not. It
usually is -- it's not material in itself and if you look at China, you can see
that people kind of arrange their travel, who have nothing to do with the
Olympics, going before and after and you have directionality issues. It
typically ends up being much ado about nothing.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
A revenue
perspective.
William
Greene - Morgan Stanley -
Analyst
Doug or
Dave, maybe I could ask one final question which is when you think about
frequent flier mile sort of preselling those miles, is the value of those miles
a function more of the size of the plan or is it a function of just the timing
of the contract and the leverage you would have at that
point?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
I'd say
both and I think that, you know, we have -- we at Northwest have not availed
ourselves of that, so we've done no forward mileage sales of our frequent flier
program and I think one of the real values and true benefits that's going to
arise from the merger is that by putting the WorldPerks program and the Sky
Miles program together, we'll have a best in class in terms of size and scope
mileage program loyalty plan, and when you think about the kind of leverage that
that could produce in terms of affinity cards, bringing on other interested
participants in the program and the like, I think that's a very, very powerful
development that the merged carrier will benefit for in the years to
come.
William
Greene - Morgan Stanley -
Analyst
All
right. Thanks for your time.
Operator
(OPERATOR
INSTRUCTIONS) Our next question comes from the line of Daniel McKenzie with
Credit Suisse. Please proceed.
Daniel
McKenzie - Credit Suisse -
Analyst
Hi, good
morning, thanks. Just a couple of quick housekeeping questions. I guess first,
have all the capacity changes been uploaded at this point?
Dave
Davis - Northwest Airlines
Corporation - CFO
They have
not all been loaded yet. Particularly some frequency reductions in the Atlantic
are not in yet. Our cancellations in the Atlantic and seasonal suspensions are
in, but not everything is loaded. Most of the domestic has been
loaded.
Daniel
McKenzie - Credit Suisse -
Analyst
Got it.
Okay. And then the second housekeeping question here is where are we at with
owned RJs at each of the wholly owned regional airlines?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
In terms
of the number that we've taken delivery of?
Daniel
McKenzie - Credit Suisse -
Analyst
Sure. And
just the total number of aircraft that are regional jets at each of those
partners.
Dave
Davis - Northwest Airlines
Corporation - CFO
Well, I
mean in terms of the number of owned 76-seaters, I believe we've taken delivery
now of probably 50ish of those aircrafts. The CRJ 200s are leased aircraft that
Pinnacle flies for us.
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
We own --
Northwest owns Ozark, has leased all the regional jets that are operated either
by our own subsidiaries or by our contract affiliates.
Daniel
McKenzie - Credit Suisse -
Analyst
Okay. And
then finally, I appreciate the RASM comments in your earlier remarks. They seem
to imply that you're not anticipating nip drop off in walk up business and I'm
wondering if you can provide some perspective about how investors should think
about that travel segment given the malaise in Detroit, and I guess in
particular I'm wondering what you're hearing from your corporate
clients?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
I would
say that our fall perspective really kind of presumes an extension of the
current environment plus the impact of the supply reductions. There clearly has
been some responses to the significant price increases that have taken place
over the last several months. Customers respond both corporate, noncorporate
business and leisure customers to that in a variety of ways and I think it's
reflected in our current results. Corporate travel, for example, is down in
volume slightly, but up materially in average fare paid such that revenue is
positive. And I think it is our view and baked into our forecast that kind of
the status quo is the jumping off point. We don't really see the world
materially increased -- improving or deteriorating.
Now, an
interesting thing though to focus on as the supply comes out in the fall, and
many of our colleagues in other airlines have talked about the need for fares to
go up and I think that's not quite precise enough. What we need is the average
fare paid to go up. And you can do that a number of different ways, and I think
encouraging and more stabilizing for the fall with the supply coming out,
average fares are going to go up and drive yields up significantly, loads will
go up as supply comes out, RASM should be very strong as we mentioned before,
and it's going to be accomplished largely by the revenue management systems
picking and choosing and dropping lower yielding lower value traffic. In
essence, you'll average up as the bottom end business is spilled off the reduced
industry capacity. So in essence, you can get materially higher average fare
paid without any particular customer being asked to dip more deeply into their
pocket. I think that's a strong support point for a fall view.
Daniel
McKenzie - Credit Suisse -
Analyst
Good.
Great perspective. Thanks.
Operator
And our
next question comes from the line of Ray Neidl with Calyon Securities. Please
proceed.
Ray
Neidl - Calyon Securities -
Analyst
Yes, just
a follow up when you were talking about the RASM opportunities. I'm just
wondering what your opinion on some of the smaller carriers that seem to be
emploding right now, like Sun Country, Spirit, Midwest, I know you have an
investment in Midwest, but they all seem to be shrinking rapidly and could
possibly disappear. What benefit do you think that could be in your system and
some are lodged in your system, what benefit do you think that could be to
further increasing your yields in RASM if they were to go away or drastically
shrink?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Ray, this
is Doug. That's not in any of our numbers, obviously, and I think it just goes
without saying that the more capacity that comes out of the business, as Tim
said, the more the rich gets -- the mix gets richer and the average fares go up.
I think the -- these kind of fuel price increases really call into question the
-- you know, the efficacy and the breadth of the low cost carrier model because
they have historically been more of spill carriers and as fares go up and the
discretionary passenger becomes less able or less frequently able to travel at
higher price, I think the most immediate impact of that is felt by those
carriers who really made their bread and butter carrying the leisure traveler.
So I think we'll have to see how that plays out as fuel continues to stay at
these levels, but I think there will potentially be a disproportionate impact
that gets felt by the folks that are focused on the leisure
side.
Ray
Neidl - Calyon Securities -
Analyst
Great.
You went a lot into the merger, the benefits of the merger. There's always a
challenge with airline mergers, we've seen that happen many times. But it seems
like the big problems you have out of the way already, the pilots, the labor
contracts, the computer systems talking with each other. What do you think is
going to be the biggest remaining challenge of this merger?
Doug
Steenland - Northwest Airlines
Corporation - CEO, President
Well,
there's -- as you said, these things are not easy but I think so far we are on
track and have every expectation to believe that we'll be able to implement the
combination in a smooth manner and to realize the synergies on the time frames
that have been laid out. To get there requires lots and lots of blocking and
tackling and I think we have gotten a head start on an awful lot of items and
our integration teams are well under way and having the alliance relationship
and having similar partners over the transatlantic, having the end to end
networks and having people in management on both sides who have known each other
over time I think has all facilitated to put this particular transaction, I
think, in a position where it's going to set the standard for how airline
mergers need to be done.
Ray
Neidl - Calyon Securities -
Analyst
Okay.
Good. Thank you.
Operator
And our
next question is also a follow-up question from the line of Gary Chase with
Lehman Brothers. Please proceed.
Gary
Chase - Lehman Brothers -
Analyst
Hi, guys.
Wanted to see if you'd be -- if you'd share your thoughts with us on the
shifting alliance landscape here. You're arguably in a position to understand
the economics there, particularly the JVs better than anyone. There are a lot of
pieces moving around, obviously some favorable things happening relative to
Delta, Northwest and Sky Team, but you're also losing Continental which is now
joining Star and doing similar things in different places. I mean what do you
think the outcome of all of this is going to be for the combined carrier? In a
vacuum, if you were doing the things that you're doing with Delta, it would make
sense that there would be some net benefit, but that's less clear when you start
moving a lot of these different pieces around. How do you think that's all going
to shake out in the end?
Tim
Griffin - Northwest Airlines
Corporation - EVP Marketing and Distribution
Let me
take a first shot at it and then others can chime in. First, included in the
synergy projections that we have given is our best estimate as to what we think
the impact is going to be of a -- of CL moving out of Sky Team. So we
anticipated that at the time we did our forecasts and then the numbers that we
presented as to merger benefits, we have included in there what we think the
Continental impact is. Previously --
Gary
Chase - Lehman Brothers -
Analyst
Sorry.
Just to be clear, have you included American BA immunized
alliance?
Tim
Griffin - Northwest Airlines
Corporation - EVP Marketing and Distribution
No,
because we frankly don't think that that's going to impact us very much.
Heathrow is not the ideal connecting complex and given the nature of how our
transatlantic operation runs, that's not a major concern. On the continental
alliance front, we had previously given some numbers based on what we thought
that Continental benefit was, but those numbers were to some extent impacted by
the fact that the first alliance that Northwest put in place domestically was
with Continental and as the Continental alliance unwinds, there will be in place
a full code share, full merger relationship with Delta and the Delta and
Northwest network integration will actually replace on a dollar for dollar basis
a lot of the alliance benefits that previously had been attributed to
Continental and the Delta -- the Delta Northwest alliance was never fully
developed in part because we had the Continental alliance there in the first
place.
These
alliances, just another observation, the Northwest tail end joint venture has
been in place for over ten years. The results that it produces have been a
product of those ten years of development. If we go back and think about what
that joint venture produced on year one, it was a relatively modest number and
so when we think about what might get generated by a Continental, United, JV or
BA American JV, a lot of this stuff happens incrementally over a long period of
time as parties get to learn to sort of trust each other and get to learn what
works and what each network is made up of, and these benefits don't just spring
to the bottom line on day one but do, in fact, occur incrementally over a long
period of time and I would expect that's what would happen as others go down
this road, if, in fact, they do because it's one thing to say we're going to
have a fully immunized -- or we're going to have a fully rolled up joint
venture. It's an entirely different kettle of fish to actually get
there.
Gary
Chase - Lehman Brothers -
Analyst
Okay.
Thanks, guys.
Operator
And Mr.
Lacko, I'll now turn the conference back to you.
Andrew
Lacko - Northwest Airlines
Corporation - Director IR
Great.
Thank you and I appreciate everyone joining us today.
Good-bye.
Operator
And
ladies and gentlemen, that does conclude the conference call for today. We thank
you for your participation, and ask that you please disconnect your
lines.