Northwest writes off Midwest investment

[Citrusflyer]

THURSDAY, Aug. 7, 2008, 11:39 a.m.
By Tom Daykin


Northwest writes off Midwest investment

Northwest Airlines Corp. (NWA) has written off its $213 million investment in the partnership that owns Midwest Airlines, a step that reflects Midwest's deteriorating financial condition.

Northwest, which owns a 47% stake in Midwest Air Partners LLC, wrote off that investment during the second quarter, which ended June 30. Northwest disclosed the write-off in its latest quarterly financial report filed with the U.S. Securities and Exchange Commission.

Northwest and majority partner TPG Capital bought Midwest Air on Jan. 31 for $451.8 million.

Based on Midwest's "financial deterioration" since then, an updated measurement of Northwest's investment resulted in the write-off, Northwest said in its quarterly financial report.

Representatives for Northwest and Oak Creek-based Midwest were not immediately available for comment this morning. A spokesman for Fort Worth, Texas-based TPG Capital declined to comment.

The write-off is "an ominous sign" for Midwest Air, said Marisa Thompson, an airline industry analyst with Morningstar Corp. Midwest, like other airlines, has been hit hard by record high jet fuel prices, and a slumping demand for air travel, she said.

But Midwest's problems are exacerbated because its non-fuel operating costs, including wages and salaries, are relatively high for a small airline, Thompson said.

Thompson and other analysts say Eagan, Minn.-based Northwest's investment in Midwest was motivated by a desire to prevent low-cost carrier AirTran Holdings Inc. (AAI) from establishing a hub in Milwaukee. TPG/Northwest outbid AirTran a year ago, ending AirTran's attempted hostile takeover of Midwest.

Midwest's current financial travails have also affected one of Midwest's chief vendors, SkyWest Airlines Inc.

SkyWest, which flies routes under contract for Midwest Connect, the regional carrier for Midwest Airlines, said Wednesday it was forced to post a $3.3 million reduction to its second-quarter revenue.

SkyWest recorded a full reserve against $3.3 million owed by Midwest as of June 30. That receivable was recorded as a reserve because of "the uncertain financial position of Midwest," SkyWest said.

Midwest has been considering a Chapter 11 bankruptcy reorganization filing, and is making 40% cuts in service and workforce by September.

Also today, Midwest disclosed declines in its business for July, one of the busiest months for airlines.

Midwest Air said its revenue passenger miles, which measures the number of passengers multiplied by the miles they fly, dropped 16.2% in July, compared to July 2007. That count was down 3% for the first seven months of the year.

The company's load factor, which measures the percentage of seats filled on flights, was 80.3% for July, down from 84.6%. The load factor for the first seven months was 75.7%, down from 79.6%.

 

[FIREMAN]

I think FL is selling and deferring B737 aircraft because they are working a deal with TPG for the B717s. The TBA on the reduction notice allows them more time to put the deal together. Then if it falls through they can go ahead and furlough. Did not read the full article yet, does Northwest give up any influence as to the disposition of Midwest?

 

[outtahere]

That sucks! Good luck Midwest guys and gals. Please don't take any cuts as they appear unnessasary.

 

[castle bravo]

Makes you wonder if Oaktree/Indigo are contemplating a similar write-off at NK. Not good.

 

[Colonel Savage]

I think FL is selling and deferring B737 aircraft because they are working a deal with TPG for the B717s...

How many 717's is AAI looking at getting? All? Most? A few?

I thought AAI didn't like the 717's after the fuel price hikes. Not profitable enough.

 

[Frequency]

I think FL is selling and deferring B737 aircraft because they are working a deal with TPG for the B717s. The TBA on the reduction notice allows them more time to put the deal together. Then if it falls through they can go ahead and furlough. Did not read the full article yet, does Northwest give up any influence as to the disposition of Midwest?

You are forgetting that Airtran is selling 5 B717's also... why would we buy some more?

 

[gt1900]

I actually heard a rumor that AAI isn't going to sell any 717's and is actually looking at MEH's 717's. As oil falls you can bet AAI will be looking at those airplanes....

 

[metroplex]

I heard a rumor that TPG is looking at buying more 717 for MEH to replace 80s.The 717 are coming from AAI....

 

[FIREMAN]

You are forgetting that Airtran is selling 5 B717's also... why would we buy some more?

From the second quarter report

Sold two B737 aircraft in April and completed agreements to sell four additional B737 aircraft and an agreement in principle for a fifth.

Thats 7 B737 for the year. No mention of selling 717s. Replacing a few 737s with 717s would also reduce capacity without reducing airframs. The rumor is they are getting 10 mil for each new 73 and 8 mil for each used. That would buy a used 71 free and clear.

 

[MSNFlier]

Likely the beginning of the end...

Man, as a Wisconsin native who has flown Midwest many times, including as recently as last weekend from MSN through MKE to DCA, I hate to write this but I think it's not far from the end for Midwest. Unless NWA is using this as some kind of accounting gambit to lessen its next quarterly income statement (and thereby, NWA/DL might think, help improve its chances of getting its merger with DL approved, or at least lessen the routes/gates DOJ might force them to give up), it's likely Midwest is headed for Chapter 7 liquidation.

NWA is essentially telling its shareholders to not only forget about any return on NWA's $213 million, but that the shareholders should think of the $213 million NWA paid for 47% of Midwest as money that was taken out back and lit on fire. Texas Pacific Group has plenty of cash, but they're not likely going to continue pouring money into Midwest if they can kill it and by doing so further solidify NWA/DL's dominance (read: pricing power) in the upper midwest. The $250 million TPG paid for its controlling share of Midwest might well be off-set by TPG being given a preferred shares-type deal for investing in a merged DL/NW.

AAI might occupy a nice niche at MKE going forward without Midwest, just as Midwest survived for 20-plus years through its love/hate relationship with NWA. And just like Midwest, AAI's lack of international service and its relatively limited US route network compared to either a merged DL/NW or stand-alone NW won't allow AAI to grow its market beyond certain levels.

Believe me, I hope I'm wrong, but I just don't see how Midwest can survive long-term (12 months or more) if NW is being even remotely honest about Midwest's current value - read: zero or less.

 

[Max Powers]

From the second quarter report

Sold two B737 aircraft in April and completed agreements to sell four additional B737 aircraft and an agreement in principle for a fifth.

Thats 7 B737 for the year. No mention of selling 717s. Replacing a few 737s with 717s would also reduce capacity without reducing airframs. The rumor is they are getting 10 mil for each new 73 and 8 mil for each used. That would buy a used 71 free and clear.

I think the 10 and 8 million is a bit high, especially now. If my memory serves we sold two brand new never used 737 (basically a paper sale) and recv'd 7.3 million for both. Or about half of what the market used to take.

Also I think it would make more sense for us to buy gate space from MEH not so much the airplanes, although that is possible if the price for the planes is next to nothing. That way we can pull ourselves out of our unprofitable markets and use the new gate space into LGA (or wherever) and put the current 717 onto those routes. In this market we don't really need new airplanes or any growth for that matter. I think the 8 percent reduction will hold fast. We need to break even or make a profit or in the long run we are toast! Growth and the belief that there will be no furloughs is a pipe dream. Hope it happens though, but I'm a realist.

 

[Jetjockey]

So much for saving the cookie. I guess that's how the cookie crumbles. The big guys get rich, and the employees are left holding the crumbs.

 

[CitationLover]

This is simply NWA adjusting the goodwill portion of its investment in Midwest airlines. They still own 47% of the airline. The sky is not falling (yet). Delta/NWA did the same thing for themselves and lopped off $10.5 BILLION in value in the first quarter. This Marisa Thompson, the "analyst" quoted in the article, is simply blabbering to get her name in a paper.

If you want the exact accounting standard it is in the NWA recent 10-Q page 28:

....and the impairment of its $213 million minority ownership interest in Midwest Air Partners, LLC in conjunction with Step 2 of the goodwill impairment test in the second quarter of 2008....

This is more about NWA crossing it's T's and dotting it's I's during a DoJ review of its merger than it is about the health of Midwest Airlines. This accounting write off further "shows their uninvolvement" within Midwest to the DoJ.

 

[Propsync]

The sky is not falling (yet).

"The write-off is the result of the application of accounting rules relating to the probability that we will recover our investment," Northwest spokeswoman Tammy Lee said in a statement. "It does not imply any judgment on our part on the viability of Midwest."


That probability would be zero. So, nope, no judgement at all. Which is true, because they knew the viability was zero from the start. If the sky isn't falling CL, where are the recalls? Reduced codeshare? New Airbii? 73NG's? New and exciting markets? Fast upgrades?

 

[Donsa320]

"The write-off is the result of the application of accounting rules relating to the probability that we will recover our investment," Northwest spokeswoman Tammy Lee said in a statement. "It does not imply any judgment on our part on the viability of Midwest."


That probability would be zero. So, nope, no judgement at all. Which is true, because they knew the viability was zero from the start. If the sky isn't falling CL, where are the recalls? Reduced codeshare? New Airbii? 73NG's? New and exciting markets? Fast upgrades?

Gone with the wind. Wrapped up in horrible business decisions ie; 88 seat 717s, hiring a fleet of 20+ 50 seat CRJs, refusing to adjust fares to reflect actual costs and a general lack of leadership, to name a few.

DC

 

[CitationLover]

That probability would be zero. So, nope, no judgement at all. Which is true, because they knew the viability was zero from the start. If the sky isn't falling CL, where are the recalls? Reduced codeshare? New Airbii? 73NG's? New and exciting markets? Fast upgrades?

Take into account the fact that you hate Midwest and that puts into context what you just said.

AAI buys MEH and there still would be in the same situation: furloughs, MD80's parked, no new and exciting markets, no fast upgrades, yadda yadda yadda. In fact every major airline can say that, but you ignore that.

AA still has 1,979 pilots on the street from 9/11. My situation could be a lot worse.

 

[Fly4hire]

Is it true that as MEH flights are being drawn down they are being replaced simultaneously with additional or new NWA flights?

 

[likeitis]

Is it true that as MEH flights are being drawn down they are being replaced simultaneously with additional or new NWA flights?

Yes....

 

[FlyWolf]

The sick calls amount is an indication that quite a few pilots and FAs wrote off Midwest as well.

 

[FlyWolf]

Is it true that as MEH flights are being drawn down they are being replaced simultaneously with additional or new NWA flights?

Yes, if you book a flight on the Midwest website your only indication that its not operated by Midwest is the type of equipment (B757, A320) and the flight number, even our employee non-rev website lists all the NWA flights, obviously you have to go through MSP to get to where you need to go.