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Northwest's Third Quarter Result

Fri Oct 26, 2001 12:47 pm

From Iwon Money:

CHICAGO, Oct 25 (Reuters) - Northwest Airlines Corp. (NWAC), the No. 4 U.S. carrier, posted sharply lower third-quarter earnings on Thursday, saved from a loss by a $249 million federal grant, as air travel demand plunged after the Sept. 11 attacks.

But excluding special charges and gains, the results significantly beat Wall Street expectations, and Northwest stock rose over 10 percent to $13.40 in midday trading on the Nasdaq.

Despite the sharp drop in earnings, the carrier was upbeat about long-term prospects and said it has $2.8 billion cash on hand to help weather the storm faced by the industry.

Shares of Northwest have fallen 38 percent since Sept. 11 but have outperformed the American Stock Exchange airline index by about 5 percent this year.

Third-quarter net income at Northwest fell 91 percent to $19 million, or 20 cents a share, down from $207 million, or $2.23 a share, in the year-ago period. Revenues fell 17.4 percent to $2.59 billion from $3.14 billion.

"The tragic events of Sept. 11 have presented significant challenges to the airline industry and to our employees and customers," said Chief Executive Richard Anderson. "The resulting reduction in commercial air travel has adversely affected our quarterly results."

In a conference call, Anderson said he was "relatively pleased" with the results, noting both July and August had been profitable months. The airline said it would have posted a profit if the attacks had not happened, in contrast to other carriers which have been losing money most of the year.

UPBEAT FOR THE LONG TERM

Northwest said its daily cash losses still range from $6 million to $8 million as travel demand remains weak, but advanced bookings are down just slightly systemwide for November.

Northwest said October domestic traffic looks to be down about 24 percent from year-ago levels. Traffic in the Pacific region is seen down 40 percent, and across the Atlantic down 25 percent.

Northwest's net income included $249 million in a pretax grant from the federal government as part of a $15 billion federal bailout package to airlines. It also included $61 million in charges related to aircraft write-down and severance charges for employees who were laid off.

The airline last month cut back capacity by 20 percent and set plans to lay off 10,000 workers as travel demand plunged.

Excluding the special items, Northwest said its loss was $100 million, or $1.18 per share. According to Thomson Financial/First Call, the airline was expected to post a wider loss of $1.54 per share.

"We were surprised by Northwest's better-than-expected showing, especially given its huge exposure to the U.S.-Japan market," said Merrill Lynch analyst Michael Linenberg.

Linenberg said he was impressed by Northwest's ability to control costs. Total expenses declined 3.6 percent as the airline cut costs both before and after Sept. 11, he noted.

CEO SAYS CARRIER SOUND

Anderson said Northwest suffered about $250 million in operating losses from Sept. 11 through Sept. 30 and that challenges remain.

However, he added that Northwest is one of the most "financially sound air carriers." The significant number of owned and mostly debt-free jets has minimized the cost of pulling down planes to accommodate the lower travel demand.

The airline is both using aircraft less and storing some in an undisclosed location while traffic remains weak.

Confirming comments to its pilots last week, the airline said it plans to take all 61 previously planned jet deliveries through 2002 including regional jets.

"Many of these new aircraft deliveries are replacements for older, larger and less efficient aircraft and they will provide favorable economics immediately upon entry into service," the airline said.

Of the 61 jets, 26 will come from Airbus (AIRB) , 23 regional jets from Bombardier (BBDa), and the rest from Boeing (BA), mostly 757s and two 747s.

Of a total current fleet of 442 planes, Chief Financial Officer Mickey Foret said 210 are owned. Of that, 50 are pledged to bank groups, leaving the rest available for financing if needed. The most recent appraisal listed the value of the "unencumbered" fleet at $1.3 billion to $1.5 billion, Foret said, although analysts noted aircraft value has fallen since Sept. 11 due to oversupply.

Additionally, Northwest said it has another $1.5 billion in off-balance-sheet items like an investment in reservation system Worldspan that could be tapped, Foret said.

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Northwest does seem to be in reasonable shape, though the 40% drop in trans-Pacific traffic must be quite alarming for NW's management. Anybody know where the undisclosed location of Northwest's grounded fleet might be?

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