Saturday, October 16, 2004

Delta at bankruptcy 'finish line'

Soaring 3Q losses have analysts predicting earlier demise

By James Pilcher
Enquirer staff writer

Financially troubled Delta Air Lines said Friday that it is burning through cash much faster than expected and its third-quarter loss will be far greater than expected.

Delta and industry observers say the airline must find a solution within weeks, and some analysts say a bankruptcy filing is all but certain even if deals are reached on concessions with the airlines pilots and debt holders.

In a filing with the Securities and Exchange Commission, Atlanta-based Delta said it anticipates its third-quarter loss to be between $625 million and $675 million, or $4.99 to $5.39 per share. The airline blamed record fuel costs, depressed fare prices and business chased away by recent hurricanes.

Previously, Wall Street analysts had predicted a loss of about $3.58 a share, or about $450 million.

"We view Chapter 11 as virtually inevitable," JPMorgan airline analyst Jamie Baker wrote Friday in a research note that also downgraded Delta stock. "Delta is not adequately addressing its debt burden," Baker wrote.

Delta has lost more than $5.5 billion in the past three years. The expected third-quarter loss would put the company more than $2.5 billion in the red for 2004 alone.

More important, the company said it burned through cash at a faster-than-predicted rate, and it anticipates its cash reserves could be as low as $1.45 billion when the quarterly results are released Wednesday.

Many experts had predicted that Delta would file bankruptcy when its available cash dipped below $1.5 billion.

"They certainly are at the finish line. This is now a matter of weeks and not months," said Calyon Securities airline analyst Ray Neidl.

Delta employs more than 8,000 workers at Cincinnati/Northern Kentucky International Airport, its second-largest hub - including 4,000 who work directly for Delta and the remainder for Erlanger-based subsidiary Comair.

Delta officials said they continue to seek solutions outside of bankruptcy court. "We continue to pursue our goal of restructuring without court supervision," said Delta spokesman John Kennedy, adding that such a filing is "in no one's best interest."

The company's stock closed at $3.42 Friday, down 18.8 percent, killing a mini-rally that began earlier this week on word that Delta and its pilots could be close to a deal.

The earnings news came less than 48 hours after Delta extended an exchange offer of about 35 cents on the dollar to holders of about $2.6 billion worth of secured debt. Delta's total debt load is more than $20 billion, which has prevented the airline from borrowing more money.

The SEC filing also came after Northwest Airlines announced a deal Thursday with its pilot union to cut costs, and on the same day that US Airways got permission from its bankruptcy judge to slash worker pay by 21 percent through mid-February as an emergency short-term cost-cutting measure. In addition, United Airlines said Friday that it would seek even further cuts from its unions as it tries to emerge from bankruptcy.

Friday's news put new urgency on talks between Delta and its nearly 8,000-member pilot union. More than 800 pilots are based in Cincinnati/Northern Kentucky.

The negotiations, which are taking place in Fort Lauderdale, Fla., are expected to continue through the weekend, with the company seeking $1 billion in annual cost cuts from its lone major union.

Delta officials say the talks are "intense" and the union told its members that "we are making progress." Neither side would give specifics, however.

Delta officials have previously said that if deals are not reached with the union, creditors and vendors "within weeks," bankruptcy is unavoidable.

"I expect it to be resolved one way or the other by early November," said Neidl. While Neidl said he thinks Delta is "very near the courthouse steps," he added that the airline still has a 50-50 chance to avoid bankruptcy.

Other analysts are not as optimistic, with JPMorgan's Baker pegging the chance for Delta to avoid bankruptcy at 15 percent because of its debt problem. Baker believes the debt issue could derail pilot talks since the union has said any deal would be contingent on a debt restructuring.

The carrier Friday also released details of an employee incentive program and said it has begun its previously announced plan to trim management costs by 15 percent. Delta plans to close its hub in Dallas/Fort Worth in January, eliminating 6,000 to 7,000 positions and cut the pay of all nonunion workers by 10 percent.

Those staying behind now get these benefits: equity in the company through a stock option plan; bonuses if company profits hit a certain unspecified point; and performance bonuses of up to $100 a month for meeting customer service or operational criteria.

The carrot for the stick

Here are details of the employee incentive plan released Friday by Delta Air Lines. It's part of a restructuring that also includes the closure of the Dallas/Fort Worth hub and the elimination of 6,000 to 7,000 positions:

• Employee equity -The company is creating a broad-based stock option plan, which will allow employees (excluding directors and officers) to purchase a total of 31.4 million shares, or 25 percent of the current outstanding stock. The options would have an exercise price equal to the fair market value of the underlying shares of common stock on the date granted.

• Profit sharing - Employees (excluding directors and officers) will be paid bonuses out of a pool of up to 20 percent of annual pretax profits in excess of predetermined thresholds, which were not provided.

• Incentive bonuses - Workers will be paid bonuses of up to $100 a month based on customer satisfaction and other operational measures (i.e. on-time rates, lost bag rates, etc.)



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