Northwest Writes Off Midwest Investment

This can’t be good. It appears that Northwest thinks so highly of its investment in Midwest Airlines that it has written it off completely. Hmm, either Midwest is in very serious trouble or Northwest has decided to just write off everything in advance of the Delta merger to clean up the balance sheet.

The actual text of the filing with the SEC says:

The valuation of investments in affiliates consists of Northwest’s investment in Midwest. This investment was measured at fair value based on an income approach, which included significant unobservable inputs (Level 3). The unobservable inputs generally include cash flow projections and a discount rate developed using a CAPM, which utilized a similar approach to the discussion of the CAPM above. However, the industry peer set for Midwest considered other mid-sized airlines similar to Midwest and resulted in a 17.5% discount rate. Due to Northwest’s position as a minority investor, current cash flow projections would result in the majority investor receiving all of the expected excess cash flows of the entity.

In other words, Northwest thinks that Midwest isn’t likely to generate much cash, and the cash that does get generated will all go to TPG, the majority shareholder in Midwest. So they aren’t saying that Midwest is worth nothing . . . they’re just saying that Midwest is worth nothing to Northwest, at least from a balance sheet perspective.

Is this just a realization of how bad things are for the carrier now or is it a sign of things to come?