Wednesday, October 20, 2004

Chapter 11 wouldn't ground Delta

Airline works to avoid it; big 3Q loss coming today

By James Pilcher
Enquirer staff writer

Wolfgang Jahn of Montgomery booked several flights to Europe for himself and his family Tuesday. He used his frequent-flier miles issued by Delta Air Lines out of concern that the financially struggling carrier might not survive a possible bankruptcy.

"I would rather have the tickets in my pocket than on my computer screen," said Jahn, a retiree and native of Berlin who now lives in Montgomery. "And I am not confident that Delta will be able to come out of Chapter 11."

Jahn is not alone - many travelers who already have booked tickets or are looking to fly over the next few months are wondering whether it is safe to book a flight on Delta. They're also wondering whether the airline will continue to honor SkyMiles if it seeks bankruptcy.

But experts and analysts say consumers have nothing to worry about in the short term if the Atlanta-based company - which today is expected to post a third-quarter loss of at least $625 million - were to seek Chapter 11 protection.

In fact, a Delta bankruptcy probably wouldn't affect:

• SkyMiles. Delta would not alter its frequent-flier program, experts say, for fear of alienating its best customers.

• Fares. The company could run a short-term sale but could not afford to cut fares long term. But Delta also couldn't raise them for fear of losing fliers to competitors.

• Local flights. The airline is eliminating its hub in Dallas in January and restructuring the majority of its network. But the local schedule is getting new flights.

• Revenues at the Cincinnati/Northern Kentucky International Airport. Officials there say any shortfall will be minimal.

"It will be sort of business as usual when it comes to flights and such," in the event of a bankruptcy, said Helane Becker, airline analyst with the Benchmark Group LLC in New York City.

"That is until they work out their new structure, which Delta has already started and will introduce in January no matter what."

The airline declined comment, saying any talk of post-bankruptcy scenarios would be speculative.

Yet Delta has repeatedly warned that bankruptcy could occur within weeks if agreements aren't reached with its pilots union and with its debt holders.

The company this morning is expected to announce a third-quarter loss of between $625 million and $675 million. Its losses since 2001 are more than $5.5 billion.

Tuesday, Delta shares came close to an all-time low, dropping 3.9 percent to close at $2.99. Since the carrier's Friday warning of widening losses, its stock has dropped 29 percent.

If Delta were to file, the airline would join US Airways and United in bankruptcy. Despite predictions of sudden cancellations of flights and the loss of frequent-flier miles, neither has happened.

More generous SkyMiles?

When it comes to SkyMiles, the last thing Delta would do is anger its best customers, said one of the nation's leading experts on frequent-flier programs. Randy Petersen, editor and publisher of InsideFlyer, a magazine devoted to frequent-flier programs, added that Chapter 11 can help such programs.

"As in the case of United and US Airways, Chapter 11 has actually kept them from making any changes and has probably led them to be more generous to woo travelers," Petersen said.

Delta customers currently hold enough miles to make roughly 14.3 million free trips, according to Petersen, which he says is the highest frequent-flier liability in the industry. He said other bankrupt carriers have made their programs more generous under bankruptcy by making more seats available for free trips.

If Delta were forced to liquidate, other members of the SkyTeam alliance, such as Continental, Northwest, Air France and Alitalia, would probably still honor its miles, Petersen said.

Fares unlikely to change

As for fares, Benchmark's Becker doesn't expect much change. United ran a fairly extensive fare sale following its filing, but Becker said the circumstances are different for Delta.

"If they were to cut fares drastically, that would be a disaster and exactly what they don't need," Becker said. "But on the other hand, they need to stay competitive, so fares won't go up either."

She and other experts, such as University of Portland (Ore.) business professor Richard Gritta, say flights also would not be cut.

"In some markets in the US Airways restructuring, the number of frequencies is actually going up," Gritta said.

Normally, if Delta or another airline were to liquidate, a federal law would require other carriers to honor tickets bought on the defunct airline. But that law could expire next month, even though Congress is working on renewing it.

Airport in good shape

Finally, Cincinnati/Northern Kentucky International Airport officials are not anticipating a big jolt if Delta goes into bankruptcy.

Airline finance director Sheila Hammons said Delta would most likely default on one month's worth of payments, estimated to be $3.5 million. That includes $1.6 million in landing fees and another $1.6 million in ramp and terminal rent.

Such a shortfall would be less than 4 percent of its operating budget, Hammons said. But parking and concession revenues have jumped in the last two months, she added, thanks in part to Delta's SimpliFares initiative that has brought more local travelers to the airport. The number of cars parked at the garage and lots went up 17 percent in September as compared with the same month last year, leading to an increase of 21 percent in parking revenue. Other concession revenues went up by about 20 percent for the month.

If it filed for bankruptcy, Delta would still be required to stay current on any payments. It is now up to date on rent and other fees, Hammons said.

In addition, $62.1 million worth of bonds Delta has taken out over the years to pay for buildings and construction at the airport may have been financed with the help of the airport authority but are still Delta's responsibility. Delta has not commented on whether it was seeking to restructure those particular bonds, which are protected by contract. But the airline is trying to renegotiate most of its $20 billion debt load.

Pilot talks continue

Talks between Delta Air Lines and its pilots aimed at avoiding bankruptcy continued Tuesday. Many experts have said that without deals with both the pilots union and the airline's debt holders within the next two weeks, the company might be forced to file for Chapter 11 protection.

Delta and its pilots union met in Fort Lauderdale, Fla., but neither side reported any details.

The financially struggling airline is seeking $1 billion worth of annual concessions from its major union, with about 66 percent of those cuts comprising pay reductions.

Atlanta-based Delta says the cost reductions are necessary for its survival - it employs about 4,000 locally, including more than 800 pilots. Another 4,000 work for Delta's Erlanger-based subsidiary Comair.

The pilots union had offered cuts worth $705 million but gave another partial proposal earlier this month. No details have been given, but the new proposal is not thought to include financial details.

Meanwhile, the airline also is negotiating privately with its debt holders. Delta, which has about $20 billion worth of debt, won't comment on those talks, either, and would not say if any talks were held Tuesday.

An offer to exchange about $2.5 billion worth of debt for about 35 cents on the dollar expires Nov. 18. Those who respond by Oct. 26 get an extra bonus.


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