Administration September 1, 2004

Northwest Takes Pension Related Equity Hit

January 21, 2003 (PLANSPONSOR.com) - Northwest Airlines has reported the company's underfunded pension plan has caused the airline to take a $1 billion after-tax reduction in shareholder equity - higher than Northwest's first pension shortfall estimates.

Reported by

Eric Hazard

The $1 billion shortfall is worse than airline officials had earlier anticipated. Northwest had projected in November that the company’s pension shortfall would be about $700 million .

Tuesday’s announcement also came as Northwest reported a fourth-quarter loss of $488 million, attributed to an overall weak economy and reduced travel spending. The loss was equivalent to $5.68 per share, compared with a loss of $216 million, or $2.55 per share in the same quarter a year earlier, according to an Associated Press story.

For 2002, Northwest lost $798 million, or $9.32 a share, compared with a loss of $423 million, or $5.03 a share, in 2001.

Industrywide Woes

The most recent statement by Northwest is the latest in a series of announcements the company has made as the airline looks to cut costs and return to profitability. Earlier in the month, the US Department of Labor’s Pension and Welfare Benefits Administration (PWBA) said it was proposing to exempt the air carrier from ERISA rules against in-kind pension contributions.

However, Northwest is far from being the only airline with pension woes. A recent report by rating agency Fitch says the airline industry as a whole is currently in a tailspin dealing with mounting pension costs and lowered revenue. The Fitch report predicts that the year-end 2002 industry funding level will be a “disastrous” 59% – down from 72% in 2001 and 96% in 2000.

“The airline sector’s pension problem is perhaps the most dire in corporate America,” the Fitch analysts wrote. “The combination of substantial funding shortfalls and very poor operating performance endangers almost every company in this sector.”

With an aggregate level of pension plan underfunding among the country’s seven largest air carriers projected to be $18.8 billion as of December 31, 2002, Fitch Ratings said airlines will join the auto (See Fitch: Auto Sector Pension Gap $30B by YE 2002 ) and steel sectors (See PBGC Exec: Pension Insurer Hit by ‘Perfect Storm’ ) that have been the most recent critical problem areas for pension funding.