Thursday, October 28, 2004

Pilots deal pulls Delta from brink

Contract concessions stave off bankruptcy filing - for now

By James Pilcher
Enquirer staff writer

ATLANTA - Delta Air Lines and negotiators for its pilots union Wednesday reached tentative agreement on contract concessions, backing the nation's third-largest carrier off the brink of imminent bankruptcy.

Details of the deal, which still requires union approval, were not immediately available. However, the Atlanta-based airline had been seeking $1 billion in annual savings - including a 35 percent pay cut.

Without such a deal, the company had appeared ready to file for Chapter 11 protection on Wednesday or this morning, when its board of directors is set to meet here.

Delta's pilots are the highest paid in the industry under a contract reached three months before the 9/11 attacks, which plunged most U.S. airlines into financial crisis.

The carrier's move to cut its pilot costs is one part of its two-pronged effort to avoid bankruptcy; the second is a move to restructure part of its $20.6 billion debt.

Delta officials wouldn't discuss the deal with the pilots or the results of an early deadline for a debt-exchange offer. The offer, which expired at midnight Tuesday, provided a bonus for holders of about $2.5 billion in Delta debt. It would give the debt holders about 35 cents on the dollar.

Bondholders at bankrupt UAL Corp., parent of United Airlines, and US Airways have received or are expected to get less than 5 cents on the dollar.

Airline analyst Ray Neidl of New York-based Calyon Securities said if pilot union members vote to approve the deal, the bankruptcy process is set back. Approval "is the key piece to getting the other creditors and bond holders to settle," he said.

Avoiding bankruptcy can appeal to the union because a filing could give management leverage on existing contracts. Once in U.S. Bankruptcy Court, a judge has the power to void contracts and set terms.

In the US Airways bankruptcy, a judge last week approved a temporary 21 percent pay cut for union workers.

Delta has been seeking concessions from its pilots for 15 months. Talks between the sides intensified two weeks ago. The tentative deal reached Wednesday came after a daylong negotiation session at the Air Line Pilots Association's headquarters in Herndon, Va., outside Washington, D.C.

The deal still needs two key approvals.

First, leaders of the nearly 8,000-member union must accept it. Members of the union's Master Executive Council were to review the contract overnight, and still could reject the deal - perhaps pushing the company once again toward Chapter 11.

Second, the concessions must be ratified by the full rank-and-file, a process that could take up to a week and would include briefings in cities such as Cincinnati - home of Delta's second-largest hub.

Delta officials would not say whether management gave the union an ultimatum or began procedures for a bankruptcy filing.

That is what happened last year at American Airlines, which had its bankruptcy papers in a truck at the courthouse steps and ready to file when its pilots union conceded.

"No one gets this close and acknowledges that they are this close without having everything ready to go," said bankruptcy lawyer Doug Tripp with the Cincinnati firm of Vorys, Sater, Seymour & Pease. "Even if they don't have final approval from the board, they've done all the groundwork and are ready to go at any minute."

Delta was seeking most of the concessions by way of pay cuts. The union was thought to have been seeking guarantees that the givebacks would not become more severe down the road as well as more generous work rules.

Pilots also were seeking a voting seat on the Delta board as well as an equity share in the airline. The company has announced plans for an employee stock ownership program, but it was not known if the pilot board seat was granted.

Neidl said he doubted that Delta settled for anything less than a full $1 billion worth of concessions.

"So many other things hinged upon that figure, so the question is how much of it is in cash and how much was in work rules," he said.

A rejection of the tentative deal would almost certainly send Delta back toward Chapter 11 - which could have implications for Comair, Delta's Erlanger-based subsidiary.

Comair is the third-largest regional airline in the country. Its pilots, flight attendants and mechanics are unionized, and the pilots and flight attendants are the best paid in the regional airline business. Including Comair in the bankruptcy would expand the local impact of the filing.

If Delta filed for Chapter 11, the bankruptcy would be one of the largest in U.S. history and the biggest airline bankruptcy ever, based on total assets involved. Other airline companies now in bankruptcy protection include UAL, US Airways and Indianapolis-based ATA, which filed Tuesday.

Delta and Comair jointly employ more than 8,000 locally at Cincinnati/Northern Kentucky International Airport - including more than 800 Delta pilots.

"We're certainly relieved that there appears to be at least a tentative deal," said airport aviation director Bob Holscher, whose facility would have lost at least $3.5 million in fees and rent if Delta were to declare bankruptcy. "With all the problems facing the industry, the last thing it needs is another Chapter 11."

Delta's stock closed at $4.94 Wednesday, up 6.7 percent on the day, but down significantly from its interday high of $5.20, with shares dropping as the day progressed and no deal materialized. The shares have gone up nearly $2 in value over the past week, and could go up further today on news of the tentative agreement.

Even with the tentative deal, Delta, the nation's third-largest carrier, still faces major hurdles, including increasingly high fuel costs.

The carrier has lost $6.2 billion in the past three years, including $646 million in the last quarter. In addition, the company has been burning through its cash reserves, although it did secure $600 million in new financing from American Express earlier this week.

That financing was contingent on a pilot deal, however, according to papers Delta filed with the Securities and Exchange Commission.


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