The dispute kicked off in April when Northwest told its flight attendants that it might not be able to make good on the buyback promise, according to a New York Times report. The stock was intended to compensate the 11,000 flight attendants for wages and benefits they gave up from 1993 to 1996.
The stock grant included a put option that gave the flight attendants the right to sell back their shares to Northwest at $46.96 a share from June 2, 2003 to August 1, 2003. The shares also conferred the right to elect three directors to Northwest’s board.
Howard Graff a flight attendants’ lawyer, said the preferred stock was part of a total package worth about $900 million issued to the airline’s pilots and mechanics as well as the flight attendants. Graff said the pilots had already traded in their preferred shares for Northwest common stock, as the 1993 agreement allowed them to do.
However, according to Graff, the flight attendants still had the right to sell $100 million worth of shares back to Northwest and that the mechanics had the right to sell back $135 million in stock. The workers’ fear, according to Graff: Northwest was going to wipe out the value of their shares. The mechanics are reported to be considering joining the flight attendants’ suit. The International Brotherhood of Teamsters, which has represented Northwest’s flight attendants since 1992, is also named as a plaintiff.
The lawsuit accuses Northwest of trying to convert “the flight attendants’ sweat equity into unpaid slave labor.” The suit asks the court to order Northwest “to comply with its contractual obligations to the flight attendants” and demands more than $200 million in damages for what it calls Northwest’s breach of contract.
Company Decision Time
The terms also called for Northwest to decide by June 2 whether to buy back the preferred shares with cash, common stock or a combination of cash and common stock. Tuesday, Northwest issued a news release saying that it had “elected to use cash.” The airline added, however, that this decision did not necessarily mean it would buy back the stock this year.
In a May 22 letter to employees and retirees holding the preferred stock, Northwest’s senior vice president for human resources, Michael Becker, said that the airline’s board would decide “on or about August 1” whether to buy back the stock. He also said that if the company was unable to buy it back, it would start paying a 12% dividend on the shares and raise the number of labor directors on its board to six from three.
Northwest’s moves and the lawsuit have again raised questions about the company’s pending request to substitute the stock of a private subsidiary to make mandatory contributions to its employee pension funds this year (See DoL Hearing to Examine NW Airlines Stock Contribution ). Companies are typically barred from contributing related-party stock to their pension funds when the transactions would take the pension funds above a 10% “self dealing” limit. But on rare occasions, the US Department of Labor (DoL) has waived this limit, and Northwest has applied for such a waiver, citing a need to conserve cash.
In its application, Northwest has proposed hedging that stock contribution with another put option, which would commit the airline to buy back the shares at a price no lower than they were deemed to be worth at the time Northwest made the pension contribution. The subsidiary’s stock is not publicly traded and Northwest has named an independent consultant to advise workers on the matter.
A DoL spokeswoman said the agency was still considering Northwest’s proposal. The waiver application is being closely watched as many corporate pension funds are coping with large deficits and seeking various forms of relief from the government.