Northwest Airlines Schedules Executive Option Swap

December 18, 2002 ( - Northwest Airlines is allowing its top executives to trade hundreds of thousands of worthless stock options for shares more likely to be money-makers - if they agree to exchange all their shares at a two-for-one rate.

A news report in the St. Paul Pioneer Press said the impact on each executive would depend on the mix of option exercise prices in that employee’s option holdings.

The newspaper quoted company spokesman Bill Mellon as saying that the program helps retain key managers by renewing their incentive to stay with the Minneapolis-area based air carrier. The program is available until January 14, the newspaper said.

Under the program, 7.6 million options are eligible for exchange for new options or phantom stock, the Pioneer Press story said.

Stock options rise in value as a company’s stock rises. For instance, a stock option with an exercise price of $20 becomes valuable as the stock’s market price climbs above that figure – allowing the investor to, in effect buy at a discount.

But, if the market doesn’t drive the share price above the exercise price, there’s no longer a point to buying the stock.

Northwest Share Price Under Many Option Exercise Prices

That has been the case with Northwest’s stock, which, like those of the other major airlines, is flying low, as it struggles to overcome the lingering effects of the 9/11 terrorist attacks, a drop in business travel and other woes.

In the past year, NWA shares have ranged from $4.71 to $20.92, the newspaper said.

Northwest closed at $7.98 Tuesday, down $0.14 cents on the day, well under the exercise prices of hundreds of thousands of stock options held by Northwest executives, the newspaper said.

Records from the US Securities and Exchange Commission indicate, for instance, that CEO Richard Anderson was granted options in 2001 to purchase 150,000 NWA shares at $11.50 and 200,000 shares at $24.55. President Douglas Steenland received options in 2001 to buy 150,000 shares at $11.50 and another 150,000 at $24.55.

Overall, both Anderson and Steenland have about 750,000 Northwest stock options.

The two-for-one exchange offer covers all options, even those that are not yet exercisable. The deal is available to vice presidents and above, Mellon told the Pioneer Press.

A Phantom Stock Deal

In another all-or-nothing deal, the airline also is offering managers who are not corporate officers the chance to exchange options for so-called phantom stock. The swap would be done at a rate of three options for one phantom stock unit.

Although it’s not the same as a regular share, phantom stock is tied to the value of a company’s stock. As the stock rises in price, phantom stockholders profit.

If Northwest receives and accepts the exchange of all eligible options, it will end up granting replacement options to buy about 3.2 million shares, along with phantom stock units redeemable for $3.4 million, based on its December 10 closing stock price.

The exercise price of replacement options will be equal to the fair market value of Northwest common stock on the replacement award date, expected to fall between January 15 and February 14.