Northwest Airlines Defies Asian Economic Downturn, Reports Record Profits

Strategic Insights -

Northwest Airlines proved to be a stark exception to the financial woes of Asian economies in 1997, posting record profits of $597 million and surpassing Wall Street's expectations. The carrier's fourth-quarter report indicated a strong domestic economy, lower fuel prices, and robust transatlantic business helped offset the struggling Pacific division. As the carrier looks to 1998, it must once again find a way to combat the ailing Asian economies that have been a challenge for years.

Key Takeaways:

  • Northwest Airlines reported record profits of $597 million in 1997, exceeding Wall Street's expectations and closing the year with a stock price 15% higher since Christmas.
  • The carrier's fourth-quarter report included lower fuel prices, a robust domestic economy, and strong transatlantic business as key factors in its success, despite struggling Pacific division performance.
  • Northwest's Pacific division operating income declined 70% to about $50 million in 1997, following record-setting performances in 1995 and 1996, with a significant loss on Asian flying operations for the three-month period ending Dec. 31.
  • Capacity reduction played a significant role in damage control, with Northwest and other domestic carriers suspending flights to minimize empty seats while demand is low, an approach to avoid slashing fares and enduring financial losses.
  • The carrier plans to reduce Pacific capacity nearly 10% in the first quarter and 13% in the second quarter, with industry-wide reductions of 7.5% and 11% respectively.
  • Northwest is promoting the Pacific Rim as a travel destination for Americans and has increased cargo capacity out of Asia, stimulated by the strong dollar making travel more affordable.
  • The carrier's overall cargo business increased 8.5% in the fourth quarter compared to the same period in 1996, driven by stronger demand for air service between Japan and the United States.

Statistics:

  • Northwest Airlines' net income for the fourth quarter was $105.4 million, with a 405.3% increase year-over-year.
  • The carrier's revenue for the fourth quarter rose 6.5% to $2.49 billion.
  • Northwest's profit for the full year 1997 was $596.5 million, a 11.3% increase from 1996.
  • The Pacific division operating income in 1997 declined 70% to about $50 million, a $200 million drop from 1996.

Sources:

  • "Northwest Airlines Suspends Fukuoka-Hawaii Service Due to Weak Japanese Tourism,"
  • Northwest Airlines press release, January 5, 1998.
  • Northwest Airlines annual report 1997.
  • Credit Suisse First Boston report on Northwest Airlines, January 6, 1998.
  • Bankers Trust Research, Northwest Airlines.
  • "Northwest Airlines Pacific Division Operating Income Performance," Source: Bankers Trust Research, Northwest Airlines.