Bankrupt Northwest Airlines [NWACQ] may form its own regional carrier to fly larger regional jets rather than farm out the routes to Pinnacle Airlines [PNCL] and Mesaba Aviation [MAIR].

In a presentation to a nine-member creditors' committee, Northwest CEO Douglas Steenland said the formation of new regional airline would be part of the carrier's recovery plan. The new regional unit would fly 70- to 100-seat aircraft.

Northwest officials would not elaborate on the plan.

Analysts suggest that Northwest maybe taking a page out of US Airways' [LCC] business plan from its first bankruptcy when US Airways formed MidAtlantic Airways to fly the Embraer [ERJ] 170s. MidAtlantic hired furloughed pilots, flight attendants and mechanics at lower pay scales. Before exiting its second bankruptcy, US Airways sold MidAtlantic and its 28 Embraer 170s to Republic Airways [RJET] as a way to raise cash.

Due to scope clauses, Northwest pilots have a lock on flying any aircraft with 70 seats or more. "We own that flying. We told Northwest management over a year ago that we are willing to negotiate on that issue," said Will Holman, a spokesman for Northwest's unit of the Air Line Pilots Association (ALPA). "Northwest pilots will be doing that flying."

As part of its December 2004 agreement to take a 15 percent pay cut, Holman said the two sides committed to meet to iron out a pay scale for 70-seat regional jets (CRAN, Nov. 15, 2004). The two sides held several meetings but never reached a final agreement.

Since filing for bankruptcy, Northwest has asked the pilots take another 28 percent pay cut. However, that proposal, made one day before Steenland's presentation, did not address the pay scale for the 70- to 100-seat aircraft. Also excluded was a pay scale to fly the Boeing [BA] 787s that Northwest has ordered.

Northwest has not said what type of aircraft it plans to buy for the new unit. While it now owns Bombardier [BBD] CRJ 200s, analysts and the union surmise that it may be flying the Embraer 170/190 family.

The DC-9 is the smallest plane in the current Northwest fleet and it is the lowest salary tier in the ALPA contract. A seven-year veteran would earn $156 an hour as a captain or $100 an hour as a first officer. With pending furloughs, only those pilots hired before 1998 are still expected to be flying, Holman said.

In July 2004, the union proposed a "competitive" pay scale that would take into account the overall pilot costs for flying 70-seat aircraft (CRAN, Aug. 9, 2004). However, while comparing existing salaries, the union did not propose a specific pay scale. Furthermore, the union at the time said it would limit discussions to the 70-seat aircraft because the larger regional jets "are too similar in size to the DC-9, and the DC-9 is extremely cost competitive in the 90- to 100-seat market."

In its petition to reject leases on a large number of planes, Northwest included four DC-9s on a list dominated by B757s, Airbus 320s and Avro RJ85s. Northwest's bankruptcy court in New York has not ruled on the carrier's lease request after a hearing late last week.

The only way Northwest can get a new regional carrier in the air with mainline employees is to set up the unit separately with its own wage scales, said Robert Mann, a New York-based aviation consultant. An earlier effort to move mainline pilots into RJs never materialized, Mann said, because other employee groups would not accept lower salaries to work on the smaller planes. "The pilots in effect would have had to subsidize the other groups. This has been a problem as far back as 1996 at American [AMR]," Mann said.

Holman said Northwest is now planning to create a new subsidiary for the larger regional jets. The ALPA pilots, he said, would not be on the Northwest seniority list, but would be allowed to move back and forth between the new unit and the mainline.

It is too early to tell if furloughed mainline pilots would fly for the new unit, Holman said. "This will be determined in future negotiations."

Both Mann and Doug Abbey, of The Velocity Group, said the new unit would probably be structured as a jets-for-jobs entity much like MidAtlantic was for US Airways.

The two analysts differ on the odds of Northwest actually forming the new unit.

"It is a Trojan horse," in the negotiations with ALPA and Pinnacle and Mesaba, Abbey said. "Ultimately, I see the AirLink partners operating 70-seaters. I can also see Northwest mainline - perhaps in concert with the regional partners - flying larger capacity 90-plus."

Because Northwest has continued to fly the smaller DC-9s far longer than most of the other network carriers, Abbey said its mainline pilots are reluctant to change their scope clauses in a way that would permit regional carriers to operate aircraft similar in size to the Embraer 190.

"Anything that approaches the DC-9 in size, Northwest ALPA will want to fly. I think that is great but it has to be at economic rates - competitive scales - with third-parties like Mesa [MESA] and Chautauqua [RJET]. Time will tell if they are creating a new unit that will do that," Abbey said.

Northwest will get the terms it needs to set up the new unit, Mann said. The carrier will get the pay scales that are economically similar to what it would pay a regional carrier, either "consensually" or by asking the bankruptcy court to void the mainline labor agreements. If the carrier goes to the court to void the contracts, Mann said it would also seek scope changes.

In the end, Pinnacle and Mesaba will still be AirLink partners flying the 50-seat RJs at smaller margins, Mann said. The new unit will fly the larger aircraft. However, Mann also sees the opportunity for another carrier - most likely Republic - to fly aircraft similar to the Embraer 170s and Embraer 190s. Republic would be the logical partner because it is the only regional carrier flying the new Embraers and it has options for additional aircraft, he added.

"The real issue will be how to get an operating certificate in a timely manner," he said. If a decision is made now to form the new unit, he said, it may be possible to certify the new unit by the time Northwest exits bankruptcy in 12 to 15 months.

The new unit would fly Embraer 190s on routes now served by the DC-9s and Embraer 170s on routes now flyby the 50-seat RJs, Mann said.

>>Contacts: Will Holman, Northwest ALPA, (952) 853-2311; Robert Mann, (516) 944-0900; Doug Abbey, The Velocity Group, (202) 338-1727.<<