Northwest Airlines Corp. Q4 2007 Earnings Call Transcript

Jan.29.08 | About: Northwest Airlines (NWA)

Northwest Airlines Corp. (NWA) Q4 2007 Earnings Call January 29, 2008 ET

Executives

Andrew Lacko – Director Investor Relations

Douglas Steenland - President and Chief Executive Officer

David Davis - Executive Vice President and Chief Financial Officer

Neal Cohen - Executive Vice President - Strategy, International and Chief Executive Officer - Regional Airlines

Timothy Griffin - Executive Vice President - Marketing and Distribution

Andrew Roberts - Executive Vice President - Operations

Analysts

Jamie Morgan – JP Morgan

Mike Linenberg – Merrill Lynch

William Green - Morgan Stanley

Gary Chase - Lehman Brothers

Frank Boroch - Bear Stearns

Ray Neidl - Calyon Securities

Daniel MacKenzie - Credit Suisse

Bob McAdoo - Avondale Partners

Liz Fedor – Minneapolis Star Tribune

Joshua Fried – Associated Press

Ted Reed - TheStreet.com

Susanna Ray – Bloomberg

Sue Turner – WCCO Television

Bob McNaney – KSTP TV

Operator

Ladies and Gentlemen, thank you for standing by and welcome to the Northwest Airlines fourth quarter, 2007 financial results conference call. (Operator Instructions) Now it's my pleasure to turn the conference over to Mr. Andrew Lacko, Director of Investor Relations. Please go ahead sir.

Andrew Lacko

Thank you, Don, and good morning everyone. I'd like to thank you for joining us today for Northwest Airline's fourth quarter, 2007 financial results conference call. Joining me today are Doug Steenland, President and Chief Executive Officer, Dave Davis, EVP and Chief Financial Officer, Neal Cohen, EVP – Strategy, International, and CEO – Regional Carriers, Tim Griffin, EVP, Marketing and Distribution, Andy Roberts, EVP – 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 our remarks today, 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 web cast at ir.nwa.com. A replay of this call will be made available on this same site shortly after the call, for one week.

With that, I would like to now turn the call over to Doug Steenland.

Douglas Steenland

Thank you, Andrew, and good morning everyone.

For the full year 2007, Northwest reported a pre-tax profit of $764 million before reorganization items. This was a 154% improvement versus the full year 2006. This marks our second consecutive year of profitability and the third highest annual pre-tax profit in the company's history.

The airline's 2007 results improved by $463 million over 2006 and over $2.1 billion when compared to 2005. Our pre-tax margin was 6.1%, the highest among network carriers. For the fourth quarter, Northwest reported a net loss of $8 million. Excluding a onetime non-cash loss on the sale of our remaining equity interest in the regional carrier Pinnacle, our results were break-even.

Let me now talk a minute about our operating performance. Our operating performance continued to improve through the quarter despite significant weather challenges and high holiday loads during the quarter. In November, Northwest announced a successful 20 point holiday travel reliability program. As an example of that success, during the peak five day Thanksgiving travel period, the airline achieved three 100% completion factor days and took only three flight cancellations over that period.

Also in December, Northwest ran a very reliable airline, despite 30 significant weather events. Northwest luggage performance also remains very strong and was the best among network carriers year-to-date through November, and we expect to maintain that leadership through December of 2007.

Our strong financial and operational results reflect the hard work and dedication of our 30,000 co-workers and I want to especially thank them for a job well done. In recognition of these outstanding efforts, and as part of fulfilling our commitment to them, we will have paid out for 2007, $125 million in profit sharing, performance incentives and reliability payments. This will be the highest employee incentives payout in company history and a nearly 175% improvement over 2006. In addition, we contributed $127 million to our employee retirement plans in 2007.

Northwest continues to focus on executing its business plan, which includes a series of initiatives to generate earnings growth in the years ahead. Key initiatives include: One, our profitability enhancing re-fleeting plan. As part of our $6 billion re-fleeting program in the fourth quarter, Northwest took delivery of its 32nd Airbus A330 aircraft. Northwest now operates the world’s largest A330 fleet, the youngest international fleet of any US carrier and the youngest transatlantic fleet of any US or European carrier.

Northwest’s 76-seat regional jet fleet also grew in the fourth quarter with the delivery of six Bombardier CRJ-900s and five EMB-175s, bringing the year's total to 13 CRJ-900s and nine EMB-175 airplanes. In the first quarter of 2008, Northwest plans to take delivery of six additional CRJ-900s and eight more EMB-175s. By the end of 2008, Northwest’s 76-seat regional jet fleet will have grown to 36 EMB-175s and 36 Bombardier CRJ-900s.

As the North American launch customer for the Boeing 787, we remain confident that the 787 will be a game changing airplane, and will allow us to increase the profitability of, and grow our international network. With the recent announcements related to the delay of the 787 production, we are working closely with Boeing to refine the delivery schedule and still expect to have the aircraft in service by mid 2009.

Northwest's 2008 flying plan also includes a reduction of its DC9 fleet over the course of the year, with the largest reduction coming during the peak summer travel months. By the end of 2008, Northwest intends to operate a year-end fleet of 68 DC9 aircraft. Although our DC9s are less fuel efficient than a newer generation aircraft like the 737-800, they have little or no ownership costs which equates to an estimated $38 per seat savings versus aircrafts such as the 737-800. This ownership advantage offsets the fuel burn difference even at today's higher fuel prices.

While Northwest is reducing the total number of DC9 aircraft it operates, the airline is continuing to increase its overall pilot staffing levels due to an increased utilization of the remaining aircraft and more charter flying. It's important to remember our current financial results do not fully reflect the benefits of the re-fleeting program that's underway at Northwest.

During the quarter, Northwest and our joint venture partner, KLM celebrated the tenth anniversary of the most successful alliance partnership in the history of the airline industry. We expect to continue to grow that relationship further with the launch of new services in 2008.

Northwest Airlines announced an expansion of its transatlantic route network with three new daily non-stop flights to London, Heathrow, from Detroit, Minneapolis and Seattle. Scheduled to begin in the spring of 2008, Northwest's new non-stop service will provide our passengers access to Heathrow, the world's preferred gateway to London, for the first time. The access to Heathrow became available this year as part of an open-skies agreement between the US and the EU. KLM and Northwest will co-locate our airline facilities at terminal four at London's Heathrow, providing more convenient and easier connections for nearly 3.5 million SkyTeam Alliance passengers who travel through Heathrow each year.

In addition to the new Heathrow service we are continuing to grow our Northwest-KLM joint venture with the launch of new service from Dallas to Amsterdam, which will be operated by KLM. And from Portland to Amsterdam and Minneapolis to Paris which will be operated by Northwest.

Also, recently Northwest was awarded new route authorities to serve Detroit-Shanghai non-stop beginning in March 2009. When combined with our existing China route authorities and our slot position at Tokyo's Narita Airport, Northwest will be well positioned to meet growing demand in China and to maintain our leadership position over the trans-Pacific.

As part of its continuing commitment to protect the environment, Northwest launched its EarthCares environmental program with a $1 million gift on behalf of the airline’s employees and customers to its founding partner, The Nature Conservancy. EarthCares will be a Northwest program for implementing new environmental initiatives that will protect land in and around the communities that we serve.

In addition to the EarthCares initiative, Northwest has been in the forefront in protecting the environment by reducing its carbon emission footprint by 25% through the transition to newer and more fuel-efficient airplanes.

As to the issue of industry consolidation, we have commented on it in prior earnings calls and in communications to our employees. We do not intend to further address the issue on this call and will continue our policy of not answering any questions related to merger talks or other speculation.

With that, I'll turn the call over to Dave for additional comment on our results. Dave.

David Davis

Thank you, Doug.

Northwest today reported a fourth quarter net loss of $8 million, or $0.03 per share. This compares to a fourth quarter 2006 net loss of $267 million or $3.06 per share. Excluding a onetime non-cash loss associated with the sale of Northwest's remaining equity interest in Pinnacle Airlines, Northwest's pre-tax results were approximately break-even for the quarter.

Northwest delivered strong EBITDA results for the year of nearly $2 billion despite higher fuel costs. As Doug stated, our margin performance for the full year was the highest among the major network carriers.

Our quarterly earnings were impacted by the implementation of fresh-start accounting and emergence-related items which are detailed in the financial statements. Also, the changes in the accounting presentation for our regional carriers continue to affect the comparison of year-over-year results for certain P&L line items. These changes are also detailed in the footnotes to the financial statements of our press release.

Operating revenues for the fourth quarter were $3.1 billion, up 3.9% from last year. In the fourth quarter, our year-over-year RASM performance continued to accelerate and exceeded our outlook earlier in the quarter with continued strong demand and yield. Excluding fresh-start accounting impacts, consolidated passenger RASM increased 5.9% on a 1.5% decrease in ASMs.

Moving to our revenue performance by region, our year-over-year RASM improvement excluding fresh-start accounting impacts was as follows. Our domestic mainline RASM was up 5.3% on 6.3% fewer ASMs, and our domestic consolidated RASM with regionals was up 6.9%. Our year-over-year regional RASM improved by 7.5% on 11.6% more ASMs which demonstrates the effectiveness of the continued introduction of 76-seat regional jets into our domestic network.

Our Pacific RASM increased by 10.2% or 8.5% on an FX neutral basis, on 4.2% fewer ASMs, primarily driven by reduced capacity in our beach markets, with the introduction of A330 aircraft replacing 747-200s. Atlantic RASM decreased 2.3%, however, excluding the impact of a onetime fourth quarter 2006 accrual, Atlantic RASM increased 3.1% on a 16.8% increase in ASMs. Increased capacity in the Atlantic was primarily driven by the annualization of new 757 transatlantic service in conjunction with our joint-venture partner KLM.

Moving to cargo, cargo revenues of $241 million were roughly flat for the quarter on 4% less capacity, leading to an increase in cargo unit revenues. In 2007, Northwest's cargo business generated $840 million in annual revenue, and it includes freight carried by our dedicated 747-200 freighters, as well as cargo carried in the bellies of passenger aircraft. In 2007, we continued to identify and implement opportunities to better leverage our unique cargo assets that will allow us to strengthen the cargo franchise.

A new leadership team was put in place that has resulted in improved operational performance, customer focus, and revenue results. While we still have a number of new actions to implement that will help to build on this momentum, we are starting to see tangible benefits and remain confident that we are on track to improving the overall performance of our cargo business.

Northwest remains focused on continuing to implement further improvements in reliability and revenue management actions to positively influence results through the balance of 2008.

Moving now to costs. For the fourth quarter year-over-year operating expenses were up $123 million, or 4.3%, to $3 billion for the quarter. Excluding fuel costs, operating expenses were down by $6 million year-over-year. Our mainline unit costs excluding fuel and unusual items were up 5.1% versus last year.

Our unit cost growth was largely the result of Northwest quickly reducing its capacity in the fourth quarter, as well as higher profit sharing, employee incentive programs, and certain non-cash emergence-related items. Excluding these three items, our fourth quarter, year-over-year non-fuel CASM increased by 1.6%. For the full year, mainline unit costs, excluding fuel and unusual items decreased 2% and are consistent with the projections in our five year disclosure statement plan on less capacity.

During the quarter we paid an average of $2.35 per gallon for fuel, excluding taxes and before out of period hedge gains, up 21.7% versus last year. Approximately 50% of our fourth quarter exposure was hedged, using a combination of swaps and collars.

Moving to the balance sheet, we ended the fourth quarter with $3 billion in unrestricted cash and $725 million in restricted cash. Included in the restricted cash balance is $213 million related to our pending investment in Midwest Airlines. We expect to be in a position to close this transaction shortly.

During the quarter we also received $97 million in proceeds from the sale of our stake in AIR Inc. There was no gain on this transaction as we had marked-to-market this investment upon emergence from bankruptcy. We expect to end the first quarter 2008 with $2.9 - $3 billion in unrestricted cash.

Our total debt at the end of the fourth quarter was $9.4 billion, including the present value of off balance sheet aircraft leases. Our net debt at the end of the quarter was $6.3 billion, which resulted in a 3.2 times net debt to EBITDA ratio.

Let me now brief you on the status of our share distributions. Following a distribution of approximately 2 million shares during the first week of January, we have 236 million shares outstanding, including 207 million shares to unsecured creditors, with a total of 7.8 billion in allowed claims, and 28 million shares that were issued pursuant to the rights offering we executed, we completed upon exiting bankruptcy.

Currently, the company has $1 billion of remaining undisputed unsecured claims to be resolved. Based on the current status of the claims resolution process, we estimate our ultimate allowed unsecured claims will remain between 8 and 8.4 billion. The next periodic distribution is scheduled for April 1, 2008. At this time, we do not know the size of this distribution.

Let me move now into guidance, in the first quarter of 2008, we expect system mainline capacity to be down 1% - 2%, with domestic mainline capacity down 4% - 5% and international capacity up 3% - 4%. Regional capacity will be up 35% - 40%, resulting in system consolidated ASMs, up 1% - 2%.

For the full year, our system mainline capacity will be down 0.5%, to up 0.5%, with domestic mainline capacity down 5.5% - 6.6%, and international up 8% - 9%. Regional capacity will be up 50% - 55%, due to continued growth and annualization of 76-seat regional jet flying, resulting in system consolidated ASMs up 3% - 4%. Our 2008 consolidated ASMs are in line with the projections included in our five year disclosure statement business plan. Bookings remain strong across our system into the first quarter, and we have seen no evidence of slowing demand.

Regarding CapEx, we expect 2008 aircraft capital spending to be approximately $1.2 billion, and non-aircraft capital spending to be approximately $250 million, which is consistent with previous guidance.

Regarding cost guidance for 2008, we expect our full year mainline CASM, excluding fuel, to be up 1 to 2% on flat mainline ASMs. For those that model Northwest on a consolidated basis, we expect full year 2008 consolidated CASM ex-fuel to be flat to down 2% versus 2007. Our 2008 CASM excluding fuel is slightly favorable to the projections included in our five year disclosure statement.

We expect our first quarter 2008 mainline CASM ex-fuel will be up 3.5% - 4.5% on 1% -2% fewer ASMs, largely as a result of the continued impact of non-cash emergence-related items in the first half of 2008, as well as year-over-year timing of maintenance checks, and increased IT investments. The impact of these items to first quarter CASM is approximately 2 to 3 points. Based on our current outlook, we expect that year-over-year CASM excluding fuel will be flat to down in the second half of 2008.

High fuel prices continue to be a challenge for Northwest in the industry. Based on the forward curve as of January 24, we expect our first quarter 2008 fuel price to be $2.63 per gallon excluding taxes, and our full year 2008 fuel price to be $2.57 per gallon, also excluding taxes.

Approximately 15% of our first quarter consumption is hedged with collars, with an average floor of $67.35 per barrel, and an average ceiling of $87.76 per barrel. For the full year, we have hedged 11% of our estimated 2008 fuel usage, using collars, with an average floor of approximately $74 per barrel, and an average ceiling of approximately $93 per barrel. We continue to have significant fleet flexibility to reduce capacity, should we see an impact on demand as a result of increased fuel prices or general economic weakness.

The effective tax rate for the first quarter is expected to be 39% for book purposes, however due to our large NOL position, these taxes are primarily non-cash.

I’d now like to turn the call back over to Doug for some summary remarks.

Douglas Steenland

Thank you, Dave. In summary, our financial results, as we’re reporting today affirm that Northwest is well positioned. Our pre-tax margins are among the very best in the industry. We have among the lowest cost structures of any US network carrier. We have a leading position in the heartland of the United States providing the Central US with connections to key domestic and international markets. We have a strong Pacific franchise and an industry leading joint venture with KLM. We have a leading Boeing 787 position with the youngest international fleet of any US carrier. We have world class, low cost hub facilities, and our liquidity and balance sheet are among the strongest. And most importantly, we have skilled and dedicated employees who are sharing in the post reorganization success of the airline.

With that, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen we’ll now proceed with the analyst portion of the question and answer session. (Operator Instructions) And our first question comes from the line of Jamie Baker with JP Morgan, please proceed.

Jamie Morgan – JP Morgan

Good morning everybody.

Douglas Steenland

Good morning Jamie.

Jamie Baker – JP Morgan

Doug, not withstanding the don’t ask, don’t tell policy on M&A, you did indicate that you expect to close on the Midwest transaction shortly. Is that the same as expecting to receive DOJ approval shortly? And depending on your answer, any color on the anti-trust review process up to this point would be helpful.

Douglas Steenland

We would expect, Jamie, to very shortly clear the DOJ process and upon that occurring we would, PPG with us providing financing assistance would consummate and close the Midwest deal. Getting cleared through the process is what we expected. If this had been another business, I think it probably would have taken less time, but the airline business is, I think always subject to a little bit more scrutiny. But nonetheless it’s our expectation that the deal will not be opposed by the Antitrust Division, in that we will be in a position in a very short period of time to consummate the deal.

Jamie Baker – JP Morgan

Thanks, and could you remind me, in the past you’ve stated a value as to Northwest as to the domestic alliance that you enjoy with Continental and Delta. Can you remind us what you’ve said in the past, and/or quantify Continental’s overall contribution to SkyTeam?

Douglas Steenland

You know, I think Jamie, we’ve given a number in the past, but if I recall correctly it was in the 125 to 200 range, and as the alliance has matured and further developed and really become sort of a baked-in part of our operation, I think it becomes a little more difficult to break out exactly what’s due to Continental and what’s due to something else, as our passengers have really become accustomed to basically seamlessly traveling over that network. But that’s probably as good an estimate as any.

Jamie Baker – JP Morgan

Okay, thank you Doug, I appreciate it.

Operator

And our next question comes from the line of Mike Linenberg from Merrill Lynch, please proceed.

Mike Linenberg – Merrill Lynch

Just back to the comment in the press release, and Doug I think you threw it out as well, where the demand environment at this juncture you’re not seeing any weakness in demand, and I presume that that’s sort of the view over the whole system. If we look at parts of your network more closely, and maybe this is also a question for Tim Griffin, I’m curious, a market like Detroit, local traffic to and from Detroit, what you’re seeing, and sort of as a second part to this question, if you can distinguish or contrast your Pacific, how the TPAC may be doing versus the Interport? The reason I’m focused on the Interport is the Japanese economy is slowing, and we did see some contraction in Singapore, and I’m wondering if you’re seeing stuff there or you’re not seeing as much because you’re de-gauging. You’re taking 400’s out and putting A330s into the market.

Douglas Steenland

Why don’t I make a general comment, and then ask if Tim or Neal want to provide any color. First, I think we’re seeing strength in where we expect bookings to be across the entire network. We do have a slight issue in the transatlantic just because we’re bringing in so much capacity that we need to - that capacity will be absorbed, but we expect that to catch up. We don’t see any unique weakness in Detroit and the Michigan area, and with respect to our Pacific operation, particularly the Beaches, as we’ve more properly adjusted that capacity, as you’ve pointed out, that market is performing very well and so if Tim or Neal, if you'd like to add to that?

Timothy Griffin

Doug, I would just add that domestically compared to where I would have imagined the first quarter to be a couple of months ago, in spite of all the uncertainty in the economy, the world’s a little better than we thought. We’re actually ahead of budget on slightly fewer ASMs than we anticipated and bookings year-over-year are up two to three seat factor points over the next two to three months.

Mike Linenberg - Merrill Lynch

Okay, and then great and then just my second, Doug, can you just update us on the timeline for the four-way JV, when maybe you’re anticipating to hear something?

Douglas Steenland

The process of the DOT from the perspective of comments and carrier participation is complete and we’re basically awaiting the issuance by the DOT of the next step in the process, which would be in order to show cause which would indicate what their preliminary view is on the application. We’re hopeful that that order will be issued shortly and we are confident that the order will be one that supports the grant of ATI.

Mike Linenberg - Merrill Lynch

Ok, great. Thanks a lot.

Operator

And our next question comes from the line of William Green with Morgan Stanley, please proceed.

William Green - Morgan Stanley

Doug, on the last call you talked quite a bit about the potential for divestitures. Has your thinking evolved since then at all?

Douglas Steenland

Yeah, I think we continue to look at that. I think we look at it in the context of thinking about the frequent flier plan as one that could be sort of – with a business plan in essence would change and it would look more like a loyalty plan than a traditional frequent flier plan. That doesn’t necessarily require a divestiture, that’s obviously an option. So, we have work underway on that, we’re not prepared to say anything more specific as to exactly where we are in that process, but we think it remains an important potential piece of upside for the airline and its something that we’re pursuing.

William Green - Morgan Stanley

And if I could just ask a couple of detailed questions, sorry, Dave, if you answered this already, other revenue was a lot stronger than we were expecting. Can you just talk about what drove that?

David Davis

I’m not sure exactly what you were expecting, but there would be sort of a re-class of some revenue from passenger revenue to other revenue associated with fresh-start accounting adjustments.

William Green - Morgan Stanley

All right, we’ll follow up afterwards on that. And then just in other rents in landing fees, if I go and take a look at the run rate where it had been in the first three quarters, it was quite a bit lower. How should we think about that going forward?

David Davis

I think the way you should think about it going forward is our fourth quarter number is probably fairly indicative of what we see into next year.

William Green - Morgan Stanley

Okay. Thanks for your help.

Operator

And our next question comes from the line of Gary Chase with Lehman Bros, please proceed.

Gary Chase - Lehman Brothers

Good morning everybody. Just a question on capacity, I guess, for any number of you. The run rate as implied by your guidance feels like its going up a little bit and obviously I understand the first quarter you’re going to be down a touch, but I also understand you were pretty aggressive about getting the capacity out, beginning really in the second quarter, but especially into the second half. So my question is, it looks like some of that is coming back and it feels to me like your run rate is going up a little bit, and I just wondered what the color was behind that.

Douglas Steenland

Let me start it off by saying, first for 2008 we’re in line with where we expected to be in our business plan. Second, as we increase pilot hiring and the like, we’re bringing back some capacity that clearly is positive and contributes to the airline that we took out last year because of that issue. And third, our regional jet deliveries which are significant RASM improvement airplanes are coming online in an expedited way and that’s what produces the numbers that you see. As Dave indicated, we continue to have flexibility as the year goes on and retain the ability to make adjustments if need be based on fuel or other macroeconomic changes.

Gary Chase - Lehman Brothers

Okay, so what you’re seeing on the revenue side justifies that expedited regional roll out?

David Davis

Yeah, I mean I quoted a number in the script that sort of showed what the RASM improvement was among our regional carriers and the results that we’re seeing so far with the introduction now of a little over 22 76-seaters, it’s been right in line with our expectation and it’s been very strong. So we’re confident that the continued roll out is something that we want to keep doing and keep doing at the pace that we’re planning for 2008.

Gary Chase - Lehman Brothers

Can there – there’s no read to - I think it was you that said it Dave, the DC9 utilization being down in the summer months, there’s no read into that other than the fleet replacement that you’re going through, right?

David Davis

I think what I said is that the DC9 fleet is ramping down in size and most of that ramp down happened post the summer months and there’s nothing really more to read into that than just the fleets getting smaller.

Gary Chase - Lehman Brothers

Okay, I just didn’t hear you right there. Could you maybe elaborate a little bit on just what’s moving around in the cost outlook for ’08 that’s better than you thought?

David Davis

I think I would say it like this. We’re slightly better than sort of our POR. We were smaller than we had originally planned to be in 2007 and we took some costs out, commensurate with that reduction. Probably not as much as we would have liked to because we pulled down on capacity pretty quickly, but now as we’re doing a little bit more growing into 2008, all those costs won’t necessarily come back on a one-to-one basis. So, I think the result is a main line CASM that you’re going to see as slightly favorable to our POR.

Gary Chase - Lehman Brothers

Okay, and then I’m sorry for this last nitpick. What’s the right run rate on interest expense, is it in that $90 million range or is it 55, I mean how do we think about that looking forward?

Douglas Steenland

I would say the run rate and interest expense with fleet deliveries; you could look at a number in the 125 million in a quarter.

Gary Chase - Lehman Brothers

Okay. Appreciate it guys.

Operator

And our next question comes from the line of Frank Boroch with Bear Stearns, please proceed.

Frank Boroch - Bear Stearns

Okay, Good Morning. Doug I was hoping you could maybe touch on your thoughts on foreign carrier equity stakes in US airlines in light of the recent Lufthansa-JetBlue deal and if you could share your thoughts on how you see today’s environment different from maybe 20 years ago when Northwest had a stake, or sorry, KLM had a stake in Northwest.

Douglas Steenland

First, we certainly don’t expect that the laws limiting foreign ownership are going to change. We don’t believe that the Congress is inclined to change that provision and so certainly for the foreseeable future, I think that the limitations that the law now provides will remain in effect.

Second, I think the tail end Northwest relationship I think demonstrates that very material commercial cooperation with economic benefit, mutual economic benefit can be realized without the necessity of equity ownership.

Having said that, I think that ownership stakes that are along the lines of what Lufthansa did that don’t have control features will be certainly accepted, I believe, by regulators and by others and given the currency relationships you wouldn’t be surprised to see others taking place by airlines that see an opportunity to get a minority interest in a US carrier at a favorable rate, favorable price.

Frank Boroch - Bear Stearns

Okay, I appreciate that. And, lastly, on the capacity front, if things start to slow down, what type of lead time do you need, given the traditional booking curve, to react to that, without making adverse changes to having to re-accommodate customers and so forth?

Douglas Steenland

Well if things slow down that means there’s room on airplanes to re-accommodate them and we have I think flexibility in our pilot contract because we have a fairly broad range of hours within the monthly max, monthly minimum that our pilots can fly. And so, I think that we’re in a position to implement quickly, if needs be, a capacity reduction.

Frank Boroch - Bear Stearns

Okay, great, thanks.

Operator

And our next question comes from the line of Robert Barry with Goldman Sachs. Please proceed. Mr. Barry your line is open.

And we’ll proceed to our next question from Ray Neidl with Calyon Securities. Please proceed.

Ray Neidl - Calyon Securities

Yeah, just to clarify with the DC9 fleets' shrinking and you having the big jump with RJ usage. Is there some point you might back up against some restraints and just go up close restrictions with just your pilots?

Douglas Steenland

No.

Ray Neidl - Calyon Securities

Okay, then it’s pretty open then. And, Doug, you’ve been working a lot, Northwest has been working a lot with the regulators in Washington with Midwest and with the North Atlantic and with your legal background you want to share with us any you thoughts you might have on the temperaments of the DOJ right now?

Douglas Steenland

Well I guess I would say two things. One is our, the ability of the closing at Midwest to take place, I think is – while it was expected – I think it does show that the department is prepared to let transactions go through, the AirTran deal went through.

Secondly, I would point out is that during the comment process on the four-way antitrust immunity application, the Justice Department filed no comments and were silent on the issue, which I think would indicate, I think one could read into it, that at least to the international competitive impact of a four-way joint venture between Northwest, KLM, Air France and Delta that the department did not see negative, competitive implications from that, which I think is a conclusion that one could draw.

Ray Neidl - Calyon Securities

Great. Thank you very much.

Operator

And our next question comes from the line of Daniel MacKenzie of Credit Suisse please proceed.

Daniel MacKenzie - Credit Suisse

Oh, hi, good morning, thanks. I guess my first question is, if the deal is closed with Midwest, I’m wondering if you could provide some color about where those losses or profits that might be recognized on Northwest income statement and whether or not Northwest had planned to call those out as special items?

Douglas Steenland

The deal has not closed yet, but we anticipate that it will shortly, just as a fact matter, and maybe Dave can address the accounting issue.

David Davis

Yeah, Midwest will not be fully consolidated into our results and the net results will appear on one particular line item, and I can get back to you on which one it is. And the answer is yes, we will be – we will sort of forward call, be calling out the impact of Midwest to our earnings.

Daniel MacKenzie - Credit Suisse

Okay, and then secondly, some of the other carriers have commented on corporate travel budget spending. I’m just wondering what northwest is seeing and separately are there any factors that may cause demand to be different this time around?

Douglas Steenland

I think it goes back to, we’ve not seen our comments about weakness in bookings are applicable to corporate travel as well. We’ve not seen declines in travel via our corporate contracts which is the best way to measure that, and we monitor macroeconomic developments the same as everyone and we will continue to do so. But at least based on all the information that’s available to us today, we don’t see a decline and if anything as Tim said, bookings are a little stronger than we had otherwise anticipated.

Daniel MacKenzie - Credit Suisse

Okay, great. Thanks.

Operator

And ladies and gentleman the following question will conclude the analysts’ portion of the question-and-answer session. We’ll now proceed with the media portion. (Operator Instructions) The final analyst question comes from the line from Bob McAdoo from Avondale Partners.

Bob McAdoo - Avondale Partners

Yeah, just a couple quick things. On the 76-seat airplanes since you have both the CRJ900 and the E175, could you just give us any kind of color as to how you view the role of one versus the other and what you’re trying to do with one versus the other relative to the DC9s or just in general?

Douglas Steenland

I think, Bob, we view them as largely interchangeable. There are a lot of differences in terms of range, but our customer feedback so far has been very positive with respect to both airplanes and we don’t have specific categories as to the EMB flies this sort of type of market and the CRJ flies this type. They interchange back and forth and they’re doing great.

Bob McAdoo - Avondale Partners

Great. And one other thing, with the weakness of the dollar, have you seen either transatlantic or transpacific, any meaningful shift in point of origin of sales?

Douglas Steenland

Yeah, we have probably seen some increase in point of sale Europe. One of the major benefits we have with the KLM joint venture is that we have access to, and full benefit of, the KLM distribution system in Europe. So, it’s relatively easy to swing back and forth depending on where demand is because we basically do the selling and marketing in the US and KLM does the selling and marketing in Europe. And so, we have two very strong teams on both sides of the ocean which helps us in these points when you have significant differences in currency.

Bob McAdoo - Avondale Partners

Okay, great. Thanks, appreciate it.

Operator

And our first question from members of the media is from Liz Fedor with the Minneapolis the Star Tribune, please proceed.

Liz Fedor – Minneapolis Star Tribune

Can you hear me?

Operator

We can hear you now.

Liz Fedor – Minneapolis Star Tribune

Okay, terrific. Good morning, Doug. I wanted to follow up on a comment you made earlier about the 787. I see in the memo that Tim Rainey sent to Northwest pilots, he said, “we are planning to take our first delivery in April/May of ’09 with the first revenue flying to begin in the summer of ’09”. Doug, you mentioned earlier starting off the Detroit-Shanghai non-stop flying, since that is supposed to start in late March of ’09, does Northwest plan to put a 747-400 on that route, begin the flying as scheduled in March, and if you do that, would you be losing money on that route for a few months until you could get a new 787 deployed?

Douglas Steenland

I think Liz, the opening fact that’s going to have to be established is a firmer understanding with Boeing as to exactly what the delivery schedule on the 787 is going to be. There are some milestones that are coming up in terms of power going on the airplane for the first time, first flight and we’ve not finally resolved and reached an understanding with Boeing as to exactly what the delivery schedules for the 787 in the new world are going to be. And until we have a certainty and confidence on that, we’re going to defer on all of the other issues.

Liz Fedor – Minneapolis Star Tribune

But Tim Rainey’s memo to the pilots I assume, was your best intelligence at that time and that’s why I was wondering are you prepared to start that route with the 747 if you had to?

Douglas Steenland

We haven’t made any decisions yet.

Liz Fedor – Minneapolis Star Tribune

Okay. And anything new on a DC9 replacement?

Douglas Steenland

We continue to look at the choices and the fleets that would be available to us and we’ve made no decisions yet on that point.

Liz Fedor – Minneapolis Star Tribune

Okay. Thank you very much Doug.

Douglas Steenland

You're welcome.

Operator

And our next question comes from the line of Josh Fried with the Associated Press, please proceed.

Joshua Fried – Associated Press

Good morning. I was wondering if you’d talk a little more about yield being up, is that more business travel, is that a general, are fare increases taking hold in a better way? Can you talk a little more about what’s behind that?

Douglas Steenland

Tim, would you like to answer that?

Timothy Griffin

Yes, I think it is really kind of across the board, the earlier, in late ’07 the LCCs had moved bottom-end prices up a bit. Recent fuel surcharge stuck with the network carriers and we’re really seeing yield strength across the spectrum.

Joshua Fried – Associated Press

All right. And on RJ flying, that’s been rising pretty sharply, can you, to what extent is that taking over from what used to be mainland flying and to what extent is that new regional flying?

Douglas Steenland

Well, it’s a combination of a number of factors. One if you recall, one of our regional carriers used to operate the Avro 85 airplane. That airplane all came out of our fleet all at one time during our restructuring so we were operating some DC9s in lieu of Avros and some of these 76-seat regional jets are being put on routes that are previously Avro routes. Other routes are in essence new flying, so for example we’re now flying year round between Minneapolis and Vancouver.

Previously in the off-peak winter season, we didn’t have an airplane that was the right size and had the range necessary to do that. Our 76-seat airplane is capable of that so we’re now able to have Vancouver on our network year round. Recently, we announced a brand new service from Detroit to Monterey, Mexico. It was done at the urging and particularly pleased our Auto company customers to see that. Again that, without the 76-seat airplane we did not have an airplane in our fleet that could fly the range but yet have the properly sized seats in order for us to start that service and to do so economically. So those are two examples of new flying that the 76-seat regional aircraft is undertaking.

Joshua Fried – Associated Press

Okay. And is it fair to say then that, does that new flying then make up a big chunk of these overall increases in regional flying that we’re seeing?

Douglas Steenland

Well it will be a combination of Avro flying, new flying and some replacement of retired airplanes.

Joshua Fried – Associated Press

Okay, thank you.

Operator

And our next question comes from the line of Ted Reed with TheStreet.com, please proceed.

Ted Reed - TheStreet.com

Good morning. I have a question about Milwaukee. On the AirTran call, Bob Fornaro said he thought you might be having buyer's remorse given the fuel price increase since the purchase and the deterioration at Midwest. I guess I’d like to ask you if you had this transaction to do over again, would you do it and at the same price?

Douglas Steenland

Yes, we think it was the right decision then, it’s the right decision today. And we’re pleased that we’ll get through the Justice Department process and be able to close on the deal.

Ted Reed – TheStreet.com

But the deal couldn’t be worth as much given the rapid increase in fuel prices and…

Douglas Steenland

If you look at things over the longer term, we’re pleased with the results.

Ted Reed – TheStreet.com

All right, thank you.

Operator

And our next question comes from the line of Susanna Ray with Bloomberg, please proceed.

Susanna Ray – Bloomberg

Hi there. I was wondering if you could clarify some comments made about cargo operations. You mentioned being on track to improve the overall cargo business this year and I’m wondering if that indicates, made any decisions about that unit, I know that you’ve mentioned last month that you were considering reviewing whether or not you can continue it and that you’re expected to decide by the second quarter?

Douglas Steenland

Well, we’ve taken a number of steps to improve our cargo business. One, we’ve put in some new management that has a particular focus on better managing our revenue and yields over the system. Our freighter unit revenue was up 6% in the fourth quarter of ’07 versus ’06. We’re looking to make some capacity changes to fine tune the network. And so, we anticipate that for 2008, our freighter capacity is going to be down versus 2007, which will obviously have a favorably impact on unit revenues. And as we implement these changes and see the improvements that are taking place in the business, we’ll obviously also continue to look at the business as a whole, look at what fleet decisions we may have to take and we’ll be addressing that issue over the course of 2008.

Susanna Ray – Bloomberg

Okay. So, that’s not really resolved yet then, still on-going.

Douglas Steenland

And, reviewing your core business is always an on-going matter, needless to say.

Susanna Ray – Bloomberg

Okay. Can you please also comment as far as the frequent flyer plan goes, do you have a timeline for any decision on that?

Douglas Steenland

No, we don’t.

Susanna Ray – Bloomberg

Okay. Is that something that you prefer to wait to decide on pending your review of merger activity?

Douglas Steenland

I think we’ve made all the comment on that we’re probably going to do on this call.

Susanna Ray – Bloomberg

Okay. Okay. Thanks very much.

Douglas Steenland

Thank you.

Operator

And our next question comes from the line from Sue Turner with WCCO Television, please proceed.

Sue Turner – WCCO Television

Good morning. Are your fourth quarter numbers where you’d hope they would be and can you give us a very simple summary on what your numbers are and how you feel about that?

David Davis

I think our fourth quarter numbers are consistent with what our expectations are and we feel that our fourth quarter results, especially when compared to our peer set, are very strong and reflect the success of the restructuring that we’ve gone through. I think a simple summary of the results is that for the fourth quarter the company essentially reported break-even results from a pre-tax perspective.

Douglas Steenland

In a quarter that, Northwest is a seasonal airline, and the fourth quarter is a historic week quarter for us, so to be able to in essence break even in one of our weak quarters with significant increases in fuel is a result that we’re satisfied with.

Sue Turner – WCCO Television

Thank you so much.

Operator

And our next question comes from the line of Bob McNaney with KSTP TV, please proceed.

Bob McNaney – KSTP TV

Good morning Doug. I can appreciate your position on not wanting to comment on merger in general terms. But I was just curious to see, I understand from the

Governor’s office that you’ve had conversations with them and I’m just curious to see if it’s your belief that the airline, the state and the MAC are all on the same page in terms of what the airline’s obligations are, or may be, to the state of Minnesota?

Douglas Steenland

I’m not going to comment at all Bob on any conversations that I might have had with any of our elected officials. What I would say is what we’ve said previously which is, on any matters, whether it’s consolidation or other, we view ourselves to have a responsibility to the communities that we serve. We recognize the important role that Northwest Airlines plays in the twin cities and not just from the perspective of an employer but also from the perspective of providing an economic engine and a transportation network that allows the area to grow and to thrive and to be the headquarters of companies and the like. And we take that responsibility seriously and it’ll obviously be an important factor in any of the decisions that we make going forward.

Bob McNaney – KSTP TV

Thank you.

Operator

And there would appear to be no further questions at this time.

Andrew Lacko

Great thank you Don and thank you everyone for joining us. Have a good day.

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