Bankrupt Northwest Airlines' [NWACQ] plans to create a new in-house regional airline has prompted strike threats from both the pilots' and flight attendants' unions.

Even though the concept antagonizes the unions, one aviation consultant deemed the concept a labor-driven plan, not necessarily a market-driven one. Another questioned the ability of the new carrier, dubbed NewCo by Northwest, to obtain investors to fund new aircraft.

While Northwest has been negotiating scope concessions from the Air Line Pilots Association (ALPA) since last October, it has embarked on an educational campaign with its employees to explain why NewCo is needed. Northwest notes that 20 percent of its routes are flown by the wrong aircraft - too small 50-seat regional jets, or too large DC9- 30s. Currently, 111 city pairs in Northwest's prime mid-continent market are served by larger, "right-sized" RJs flown by rival carriers.

NewCo would fly two classes of regional jets. By 2010, NewCo would have 60 planes in the 70- to 86-seat class and 45 in the 87- to 100-seat range. The carrier indicated that the fleet could be the Bombardier [BBD] CRJ 700/CRJ 900 family or the Embraer [ERJ] 170/190 family.

The new aircraft would replace 35 Avro RJ85s now flown by Mesaba Aviation [MAIR] and 19 Northwest DC-9s that need to be retired. The rest of the new aircraft would be brought on for expansion opportunities.

The Northwest unit could compete with the expanded operations of the Northwest AirLink regional partners. Northwest is currently soliciting proposals from regional carriers to fly its 50-seat CRJ 200 fleet as well as an unspecified number of mid-size RJs, with up to 75 seats.

Pinnacle Airlines [PNCL] had been flying 139 CRJ 200s until Northwest returned 15 planes on Oct. 31. Northwest's solicitation is in essence all of Pinnacle's flying, plus the growth opportunities with the mid-size RJ.

Mesaba, forced into bankruptcy by Northwest's restructuring, has been flying a mixed fleet of Saab 340s, the Avros and two CRJ 200s. Northwest notified Mesaba last week that it would be pulling the Avros - as it had been feared since last fall - between May and December. It will pull two more Saabs in April. And, if Mesaba does not win the contract for more CRJ 200s, then Northwest will pull its two RJs. Mesaba will base its recovery plan on a fleet of 49 Saabs, the carrier said in a filing with the U.S. Securities and Exchange Commission (SEC).

Northwest won't say why it would have at least two carriers flying similar sized aircraft - most likely at different labor rates.

The carrier needs changes in the ALPA contract for the regionals to fly the larger aircraft and for NewCo even to exist.

The New York bankruptcy judge is scheduled to resume a hearing this week on Northwest's motion to void its labor agreements. The carrier and its unions last fall reached an interim agreement that cut worker salaries almost as deeply as Northwest first sought, but the interim pact deferred all non-salary issues - including scope changes.

Both the pilots and the flight attendants told the court in motions opposing Northwest's moves that they are prepared to strike if their contracts are voided and the scope language changed. It remains uncharted legal ground if such action also voids the lengthy mediation process spelled out in federal laws designed to forestall strikes in the industry.

The judge last week did grant Northwest another six months to reorganize its operations without any interference from its creditors.

NewCo would be a separate, wholly owned subsidiary that would be staffed by furloughed ALPA pilots at a wage scale apart from the carrier's mainline schedule. Northwest CEO Douglas Steenland predicted in the company newsletter that by 2008, more than 800 pilot jobs would be created at NewCo. "Those pilots would still have recall rights to work for Northwest when that opportunity arises. If NewCo is not created, the job of flying regional jets will go to other third-party carriers outside of Northwest's control with their own existing pilot workforce."

A filing by the Professional Flight Attendants Association indicates that non-union flight attendants would staff NewCo's planes.

ALPA has instead suggested the formation of "N Star," a regional unit that would be a division of Northwest. The N Star pilots would be paid "no less [than] the average pilot cost of the industry contracts covering comparable equipment."

The structure for NewCo would be similar to that of MidAtlantic Airlines, which US Airways [LCC] formed in its first bankruptcy to fly the Embraer 170. However, MidAtlantic was a division of the mainline - not a stand-alone unit like PSA or Piedmont.

Last year, US Airways sold the assets - not the division - to Republic Airways [RJET]. Furloughed US Airways pilots - ALPA members - staffed MidAtlantic. In the sale, many of these ALPA pilots lost their jobs to the Teamster-organized Republic pilots.

ALPA is worried that if Northwest divests NewCo, then the pilots would lose their jobs, said George Hamlin, a Northern Virgnia-based commercial airline consultant. "NewCo could escape Northwest's ownership structure and ALPA's contract and become a gun for hire."

By forming NewCo, Northwest is addressing labor concerns, said Tulinda Larsen, a consultant with BACK Aviation Solutions. It remains to be seen if NewCo makes economic sense, however. The business plan may make more sense if the bulk of this flying were assigned to an AirLink partner, which may have a lower wage rate, she said.

Aircraft

Hamlin predicted that Northwest would split its aircraft purchases between the regional units. In the interests of fleet commonality, he said the AirLink partners would fly the CRJ 700 and perhaps the CRJ 705. NewCo in turn would fly the Embraer 175 and Embraer 190 because passengers see these planes as smaller versions of mainline aircraft. Moreover, the CRJ 900 is not large enough to carry 100 passengers, he said.

NewCo gives the appearance that Northwest is segmenting its fleet by operator. "This is something else that may happen later. I can see ALPA's concern," Hamlin said.

In Steenland's message to employees, he said Northwest does not plan on having NewCo fly all domestic routes while the Northwest mainline flies only international routes. However, in the negotiations with the flight attendants, Northwest has been seeking scope changes to enable it to staff international flights with non-union, overseas-based flight attendants.

Financing

The major reason Northwest wants NewCo to be a separate corporation is so it can obtain its own line of credit. Steenland told employees that Northwest's own balance sheet needs to be able to finance more than $1 billion in new mainline aircraft scheduled for delivery this year and next. In addition, 18 Boeing [BA] B787s and 14 B747 freighters are on order.

NewCo could perhaps obtain new aircraft financing for its 100-plus aircraft more easily as a stand-alone entity than as part of Northwest, he said.

However, that plan is flawed, Hamlin said. NewCo's clean balance sheet may make little difference to potential aircraft lenders since NewCo "is utterly beholden to Northwest for success. If an investor does their homework, they will not be thrilled."

Whether NewCo is paid by Northwest for its flying or if it were to be part of Northwest, Hamlin said it is the same revenue stream. "If all the money to pay the debts all comes from the same place, does it make much difference how NewCo is set up?" Hamlin asked. Embraer and Bombardier could possibly be considered second class creditors since NewCo will not be a direct unit of Northwest whereas Boeing and Airbus would be considered primary creditors since their relationship is directly with the parent company. This could be the situation even if NewCo is profitable, but Northwest mainline is not, Hamlin said.

While the ownership structure has not been finalized, some equity will need to be invested into NewCo as it seeks an operating certificate from federal regulators. It must be able to prove that it is economically viable, one industry insider told Regional Aviation News. Northwest hopes NewCo will be in the air next year.

>>Contacts: George Hamlin, consultant, (703) 526-6694; Tulinda Larsen, BACK, (202) 783-5052.<<