Wednesday, July 14, 2004

$1.5B tax write-off by Delta

Horizon cloudy for troubled airline

By James Pilcher
Enquirer staff writer

Delta Air Lines Tuesday said it could no longer predict when it will return to profitability, so it would no longer carry more than $1.5 billion in deferred income taxes on its balance sheet.

The result will be a non-cash charge to earnings for the second quarter, as the Atlanta-based airline clears out all of the tax "assets." Coupled with another $117 million charge associated with the pilot pension fund, the airline will declare a $1.65 billion non-cash charge for last quarter.

The news sent Delta stock down 9.8 percent, or 66 cents, to close at $6.06.

Atlanta-based Delta, which operates its second-largest hub locally, announces its second-quarter earnings Monday.

"It is now unclear as to the timing of when the company will be able to generate sufficient taxable income to use its deferred income tax assets," said Delta executive vice president and chief financial officer Michael Palumbo in a memo to employees Tuesday. The move "may prompt further concern about Delta's financial situation."

Palumbo said that rising fuel costs and low yields - the revenue gleaned from each ticket - caused the situation to worsen, but said that the company's cash situation remains stable. Delta also has pushed for major concessions from its main union, the pilots, to further reduce costs.

"If anything, the charge should send even stronger signals to Delta's pilots that the company's financial position is precarious," wrote Credit Suisse First Boston airline analyst Jim Higgins in a note Tuesday that also widened the predicted loss for the quarter to more than $286 million from $186 million. "Getting Delta's costs to where they need to be in order to avoid bankruptcy is not a given."

Previously, Delta was listing deferred income taxes as a non-cash asset when the company declared a loss, as allowed by the Internal Revenue Service.

Those assets could then be used to pay off actual taxes when a profit was declared. But such practices are subject to periodic review, which led to Tuesday's announcement that since profitability could not be predicted for the foreseeable future, Delta was writing off the tax "assets" as a non-cash loss.

Delta also said that it would not continue deferring taxes because of the uncertainty over when it might it might make a profit.


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