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Article Excerpt
OPERATOR: Welcome to the Northwest Airlines third quarter 2008 financial conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, October 22nd, 2008.
I would now like to turn the conference over to Andrew Lacko, Director of Investor Relations. Please proceed.
ANDREW LACKO, DIRECTOR OF IR, NORTHWEST AIRLINES: Thank you, Addison. Good morning, everyone. I'd like to thank you for joining us today for Northwest Airlines third quarter 2008 financial results conference call. Joining me told on the call are Doug Steenland, our President and Chief Executive Officer; Dave Davis, our EVP and Chief Financial Officer; Tim Griffin, our EVP of Marketing and Distribution; and Ben Hirst, our SVP of Corporate Affairs and General Counsel. On today's call Doug will provide opening remarks, followed by Dave, who will review the quarter's results and provide you with additional forward guidance. After our prepared comments, 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. Addition 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'd also like to remind everyone that today's call is being recorded and it is also being webcast at IR.NWA.com. A replay of the call will be made available on this same site shortly after the call for approximately one week. I would like to now turn the call over to Doug Steenland.
DOUG STEENLAND, PRESIDENT & CEO, NORTHWEST AIRLINES: Thank you, Andrew. Good morning, everyone. This morning NWA reported a net loss of $317 million for the third quarter of 2008. These reported results include a $410 million non-cash charge associated with marking to market Northwest out of period fuel hedges. Excluding this extraordinary charge, Northwest reported an adjusted net income of $93 million for the quarter in a pre-tax margin of 2.5%, which was the highest among network carriers. We are particularly pleased with these results given the unprecedented challenges posed by the record high fuel prices during the quarter. These results compared to the third quarter of 2007, when Northwest reported an adjusted net income of $232 million, excluding out of period fuel hedges. Northwest ended the quarter with unrestricted liquidity of $3.4 billion, which is among the strongest liquidity positions in the industry. In a few moments Dave Davis will provide you with additional color on our third quarter financial performance, but first I'd like point out a few highlights of the quarter.
I'll start by commenting on Northwest's exceptional operating performance in 2008. Through the first nine months of the year, Northwest has achieved 19 100% completion factor days worldwide and 29 100% completion factor days in North America. This outstanding performance has continued beyond September into October. Through the 20th of October, we've had eight perfect system completion system days and nine perfect North American completion factor days. Further evidence of our strong operational performance is shown in the most recent DOT reporting data which measures industry performance through August. For the month of August, Northwest was the industry leader among network carriers in on time performance, fewest mishandled bags, fewest customer complaints, and highest completion factor. When measured on a year-to-date basis, Northwest ranked first in departure within zero performance, fewest mishandled bags, and fewest customer complaints. Northwest also ranked second in completion factor and third in on time performance.
This high level of performance is continuing. In September our DOT A14 on time performance was 89.5% and it's 91% month to date in October. North American completion factor was 99.5% in September and is 99.9% in October. Our DOT luggage handling performance in September was 2.2 mishandled bags per 1,000 passengers and October month to date is 1.8 mishandled bags per 1,000 passengers. This stellar operational performance is the direct result of the hard work and dedication of our co-workers, and for that I say thank you to them for producing these outstanding results.
Turning back to third quarter financial performance, Northwest earned almost $100 million despite a $688 million increase in year-over-year fuel costs, excluding the impact of out of period fuel hedge losses. In Q3, we were able to grow top line revenue by 12.4% and consolidated passenger revenue by 11.3%. Northwest's unit passenger revenue performance or PRASM also continues to be very strong. During the quarter we grew domestic mainline PRASM by 10.7% and consolidated PRASM by 8.1%. This impressive PRASM growth is the result of prudent capacity reductions implemented during the quarter and disciplined industrywide fare actions.
In addition to PRASM growth, we continue to see strong ancillary revenue growth. The airline's -- our first and second checked bag fees are performing exceptionally well, and based on the most recent data available the bag fee initiatives are generating an incremental $150 million to $200 million in additional revenues on an annualized basis. Fuel continues to be Northwest's single largest cost item. While still at historically high levels, recently the price of crude oil has fallen dramatically. Since reaching its peak in July, as of October 20th, the price of crude oil has declined over $70 a barrel. I would also note that at least as of today, the price of fuel has gone down to $68 a barrel as of this call, and for every $1 reduction in the price of oil, Northwest's fuel costs are lowered by approximately $40 million annually.
We're also pleased with our unit cost performance. Mainline ex fuel CASM fell by 1.1% in the quarter despite a 1.3% reduction in capacity. The airline industry in general and Northwest in particular are well positioned to prosper despite the current economic uncertainties. The historic run-up in fuel prices earlier this year led to unprecedented industry capacity reductions that have recently been implemented. These reductions leave the industry well suited to deal with potential future demand softness. We believe that this is a unique situation because prior economic slowdowns were not accompanied by capacity reductions of this magnitude that were implemented in advance of the economic slowdown. These capacity reductions combined with the significantly lower fuel prices create the conditions for sustained profitability.
Let me provide you an update on the status of our merger with Delta. On September 25th, Northwest shareholders overwhelmingly voted in favor of the merger agreement, with more than 98% of the shares voted supporting the transaction. Delta shareholders also approved the merger on that same date. On closing of the merger, which we expect to occur soon, the two carriers will begin to realize annual synergies now estimated at $2 billion by 2012. One time integration costs are now estimated to be approximately $600 million spread over three years. The combined carrier will have among the strongest balance sheets and liquidity positions in the industry. We continue to make significant progress on integration planning and expect a smooth transition to creating the new Delta.
Before I turn the call over to Dave Davis, I would like to note that this will likely be Northwest's last earnings call as a standalone airline, and I'd like to thank all of you for your interest and attention to Northwest over the years. Dave?
DAVE DAVIS, EVP & CFO, NORTHWEST AIRLINES: Thank you, Doug, and good morning, everyone. As Doug mentioned earlier, Northwest today reported a third quarter 2008 net loss of $317 million or $1.20 per share....
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