Northwest plan

A bankruptcy court judge in New York this week gave Northwest Airlines permission to emerge from chapter 11. The company's reorganization plan drew a rare show of support ... more than 97% of the creditors eligible to vote on the plan have approved it.

The airline said in a statement that it expects to re-emerge formally on May 31.

According to the plan, NW's secured creditors will be paid in full. Most unsecured creditors will be paid subject to a discount, which will vary in size depending on the nature of their claim. They'll get as much as 83% of what they were owed, as little as 66%.

The old stockholders will get nothing. The new company will raise its initial round of operating cash by selling new shares, which will trade on the NYSE under the symbol NWA.

This is as it should be. I don't mean that the re-emergence of the airline is a good thing. My view has long been that the airline industry desperately needs consolidation, and that the revolving-door bankruptcies are part of the problem, not part of the solution. If Northwest were actually liquidated, and its fleet melted down into scrap so that none of those planes would ever serve passengers again, the remaining airlines would face that much less competition, and the industry would be closer to a sustainable equilibrium.

This would mean higher costs to passengers -- but then, passengers aren't entitled to an endless future of below-cost pricing.

What is as it should be about the plan is that the old equity owners are zeroed out. THAT will be a disincentive for them to ever invest in an airline again, and the punishment meted upon them may serve the goal of consolidation, too.

More generally, the system of corporate law in most of the world these days, a system with Anglo-American roots, links the "residual risk" borne by equity holders to their dominance as decision makers. The board of directors of any company is supposed to represent the holders of equity, precisely because they represent the folks who have no contractual interest, who stand to lose everything if the operation fails.

There is an intuitive force to this connection of ideas and it is good to see the "loss" part of the profit-and-loss equation coming to fruition.