Posted on 09/14/2005 2:27:17 PM PDT by Turbopilot
Delta Air Lines filed for bankruptcy court protection from creditors Wednesday, finally conceding that it cannot reverse four years of massive losses without restructuring its finances under a judge's supervision.
The Atlanta-based airline, the nation's third-largest, said it will continue normal operations and that its entrance into Chapter 11 proceedings won't affect flight schedules. The company, which has about 25,500 locally based workers, said employees and retirees will continue to be paid.
Delta's bankruptcy judge is expected to approve a raft of initial motions to ensure continued operations.
Delta said it has obtained $1.7 billion in so-called debtor-in-possession financing, primarily from GE Commercial Finance and Morgan Stanley, to sustain operations during the reorganization.
Led for the past 20 months by chief executive Gerald Grinstein, Delta struggled mightily to craft a turnaround outside bankruptcy court. But a filing became widely expected as high fuel costs undermined the effort this summer, and the price spike after Hurricane Katrina tightened the screws.
"It was already fourth and long when Mr. Grinstein took over," airline industry consultant Michael Boyd said. "The three reasons he wasn't able to avoid bankruptcy are fuel, fuel and fuel."
Delta joins United Airlines and US Airways as the third major U.S. airline flying under bankruptcy court protection, although those carriers may soon emerge. While Delta plans business as usual, it faces an uncertain journey through a long and delicate legal process that has been a lifesaver for some companies but quicksand for others.
"Delta has every chance of coming out of Chapter 11 in a relatively short period of time," said Morton Beyer, retired chairman of industry consulting firm Morten Beyer & Agnew.
"But the bankruptcy court judge is going to have a lot to say about it, and so will labor and lenders," he added. "Delta's fate is no longer in its own hands."
Filing Chapter 11 enables Delta to suspend certain debt payments while crafting a plan for paying off creditors and operating profitably when it leaves bankruptcy court. Delta's debts have ballooned to more than $20 billion as it financed losses since early 2001.
The process could include deeper changes, however:
• The airline, with a judge's approval, could pare more unprofitable flights, shedding more employees and aircraft in the process. It's already eliminated one hub and made plans to scale back another.
• Delta could follow United in seeking to terminate its pension plans, now underfunded by about $5.3 billion, shifting the responsibility for payments onto the quasi-federal Pension Benefit Guaranty Corp.
• Companies often get new major stakeholders or top executives while in Chapter 11 proceedings. Grinstein, 73, has already indicated he will leave within a year or so.
• Delta's current stock — already shoved under $1 a share by the financial stress — could become worthless.
• Delta, which has among the weakest international networks of the major airlines, could also ultimately be merged with another carrier, some industry experts have suggested. US Airways hopes to emerge from Chapter 11 through such a combination with America West.
Delta filed its case in federal bankruptcy court in New York, which has experience handling major corporate bankruptcies.
In addition to first-day motions to assure operations, other early matters before the judge will include formation of committees representing different classes of creditors. The entire case is likely to take months or even years. United, for instance, is in its third year flying under Chapter 11.
Prosperity gone
While not unexpected, the filing is a huge comedown for a company long known as an Atlanta success story.
Delta was founded in Louisiana in 1924 and moved to Atlanta in 1941. For the next 50 years it was one of the industry's more successful players. It profited from rival Eastern Airlines' slow demise after deregulation and became known for well-compensated workers and the "Delta family" culture.
That culture eroded during a financial slump in the early '90s after Delta bought Pan Am's European routes and was hit with soaring fuel costs and a recession after the earlier Gulf War. But Delta recovered to post record profits in the latter half of the decade.
Delta's current slump started when the economy slowed in early 2001. It accelerated when 9/11 sent big carriers into freefall while also opening the door for rapid growth among discount competitors.
Initially, Delta was in better shape than most other big airlines, having bankrolled $2 billion from borrowings shortly after 9/11. But high costs and debt, a decline in high-fare business travel, Internet fare-shopping and the growth of discounters in key markets led to losses that tapped out Delta's credit and eroded cash reserves. By the end of this year alone, Delta faced $2 billion in debt, pension and capital obligations before Wednesday's bankruptcy filing.
The discounters, such as AirTran and Southwest, increasingly dictate pricing and have lower cost structures that allow them to make money on lower fares. Delta and other so-called "legacy" airlines have higher costs due to more complex hub operations and more senior employees with traditional pensions, among other factors.
Delta also suffered the distraction of an executive pay controversy in 2003, when it disclosed that top executives took big bonuses and set up bankruptcy-proof pension trust funds for themselves amid mounting losses. A subsequent management overhaul delayed a critical pilot pay cut deal and serious restructuring moves.
Under Grinstein, a longtime board member who became CEO in the shakeup, Delta launched a massive turnaround plan one year ago, including job and pay cuts, closure of a Dallas hub and revamped schedules at its Atlanta hub. Those moves, plus a pilot contract cuts and financing from key business partners, helped Delta avert a Chapter 11 filing last fall.
Through the first half of this year the changes had cut non-fuel costs almost 12 percent. But jet fuel costs soared unexpectedly. Delta said it expects fuel costs this year to be about $1.5 billion more than in 2004, consuming all of the savings from the pilot deal and then some.
Plenty of passengers
Delta doesn't lack passengers. Through the first six months of 2005, traffic was up 7 percent and revenue up 4.6 percent vs. 2004. But costs rose 9.8 percent, led by a 53 percent jump in the average price per gallon of jet fuel. Delta posted net losses of $1.45 billion for the first half of the year, or about $1 billion excluding special items such as restructuring charges.
Chapter 11 filing gives the airline powerful leverage to seek lower payments to shed billions in debt and pension obligations and, with a judge's approval, make further cost-saving internal changes.
Last month, Tejas Securities analyst Robert Halder estimated that almost $7 billion of Delta's debt is unsecured. In the bankruptcy reorganization, most of that debt is likely to be converted from debt to new stock at pennies on the dollar, experts say.
But sustained high fuel costs will compound Delta's challenge — and could even threaten the prosperity of the discounters. Experts say that in Chapter 11 Delta likely will launch new waves of turnaround tactics, well beyond last fall's plan.
Delta's stakeholders also expect the airline to rapidly move to cut employees' pay and pension plans and retirees' medical benefits. Monday, Delta sent its pilots — its only large employee union — "a comprehensive, deeply concessionary contract proposal," the union said. Pointing to cost cuts United has wrought in Chapter 11, industry analysts believe Delta could move to terminate its pension plans and seek pay and benefit cuts and efficiency improvements totalling $400 million to more than $1 billion annually.
That's on top of more than $1 billion in annual payroll givebacks from last year, when Delta cut most employees' pay 10 percnet and pilots took 32 percent pay cuts following protracted negotiations. Prior to that they had been by far the industry's highest paid pilots, owing to a lucrative contract inked just four months before 9/11.
In bankruptcy court, if further talks fail to yield a deal with the union, Delta can ask the judge to impose terms. In other airlines' bankruptcy cases, that threat has usually resulted in concessions deals without a judge's intervention.
Delta's other big worker groups — agents, mechanics, flight attendants and office workers — are not represented by unions.
Richard Aboulafia, aerospace analyst at the Teal Group, said Delta was making real progress in cutting costs and improving operations before this summer's fuel price spike. But the airline was so weakened by four years of losses that it ran out of options.
"The world owes Delta one bankruptcy filing," he said. "The company has paid its bills for more than 75 years. It's a conservative carrier and an industry leader that's the victim of circumstances beyond its control.
"Delta didn't go on some spending spree that caused all these problems," Aboulafia said. "They slowly built up over time. Other airlines have been desperate. But Delta always seemed to have more time."
— Staff writer Dave Hirschman contributed to this article
If that were so, they'd all by going bankrupt. Delta doesn't pay any more than the others.
Of course it is facetious. I would be outraged if someone cut my salary, yet it is talked about like no big deal. And they have no rights to stand up for themselves. Big business, same as big government controls the worker. And these workers are highly skilled pilots. Who is going to be next?
The thing that some will miss is the working conditions. Nobody flies who doesn't love it, but there is also all that wonderful time off between flights too.
Thank you for your reassurance. We have recently purchased tickets for a late October flight to Atlanta (college trip).
What do you mean by that? Don't we all have to make a living somehow? It is the quality of work that is important. Yet there are many people whose quality of work sucks. And they can't do anything about it.
"If you want to "blame" any single factor, look at fuel prices. A distant second is labor, but Delta has and is continuing to cut those costs. But with fuel at a speculation-free $30-$35/barrel, Delta would be profitable."
Delta is also saddled with a poor route system. Its costs are actually below average for a legacy carrier (at least following the 2004 wage concessions) but the revenue yield on its system is farther below average.
The Atlanta hub continues to be workhorse of the system, but Cincinnati and Salt Lake City are marginal hubs, at best. And Delta management took about 10 years too long to close the DFW hub.
The best thing that Delta management could have done in the past 15 years is to have merged with Continental when it had a chance (about 7 years ago.) They could have consolidated the DFW hub into Houston, and the JFK international operation into Newark.
Rumors are that Delta and Northwest might get together as they pass out of bankruptcy.
Somehow or another, Delta needs to rethink its route system. Cost-cutting isn't going to solve that problem.
You might be right. Any predictions on who the survivors will be?
"Nothing will change immediately regarding operations."
That's right folks. They will still manage ineptly, and their customer service will still be atrocious. What am I talking about, you say? I'll tell you what recently happended to me. Last December I flew OUTCONUS and my mother and stepfather, a Korean war vet, came out to meet me. He got hurt and had to stay in a hospital and I stayed with him until he could fly out. I had hell convincing Delta to change his ticket so he could fly back to the states. Reluctantly their "special services" on the phone agreed. I arrived at the airport ticket desk with my stepfather, gave them a confirmation number, and stood back and watched the games begin. The desk jockey said they couldn't honor the request even though I had a confirmation number. I was told I had to buy another ticket. It was 11pm at night and I looked over at my stepfather sitting in a wheelchair brought directly from the airport with a catheter inserted, and bought another 1100.00 ticket. As we were flying back CONUS I turned to someone sitting next to me and said that there was no doubt that this airline was going to go under.
You tell the corporate execs and those in charge of "special services", and their jobs, to rot in hell.
They deserve it. Hopefully the mechanics can get on at American, who does a decent job, and Southwest who does an incredible job.
Last year I did a simulation study of airport operations. We all have personal stories to share about poor service, but anyone would be shocked at the total number of inefficiencies. For example, there is no decent communication system to coordinate ground operations and so many different businesses and unions service the airplane, that it is almost impossible to have any coordination at all.
The solution seemed to be to revamp the entire airport infrastructure, but because there is no single unit of control, it is almost impossible to change anything. Most airports are run by a port authority and government often has no incentive to make improvements. Here is one area where improvements could be made that would result in great cost savings that could also help the airline's bottom line.
Arena?
Extend
Junk.
either they conceed or a bankrupcy judge will simply order a "cram down" concession.
Junk? Tool of choice.
For people with no choice. Those that work for large firms, for instance.
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