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
I hate flying out of PDX. Security is very *sweet and nice and PC*, and would never dream of checking out an Middle Eastern type, but will hold a very seasoned citizen and running a wand over her while the dear lady stands in a puddle of urine.
>Vast capital investments, name recognition, and enormous established infrastructures for pennies on the dollar. Why not, at current prices?<
the only reason that SouthWest is making money is,
they have a lot of 'big-fat-dummies' to beat up on,
ie United, Eastern, Northwest Orient, etc.
when all the dummies are dead, all Southwest's
competitors will be a lot like SW.
The Civil Areo Board, or whatever it was,
is gone forever...
Implies, perpetual overcapacity.
Also, when a big-fat-dummie dies,
their 'airport gates' becomes available to others.
adding to post 144,
airline profits, IMO, seem tied to some 'bottleneck'.
ie, a shortage of aircraft when the jet came along,
routes controlled by the Civil Air Board.
one airline 'owns' all the gates at a certain airport,
intertional flight - bilateral issues,
overcrowded airports.
Some of the things I just wrote,
can change over time.
Oh, I am. I expect GM, Ford, and a number of other big names to do the same by the end of the year. The auto industry is hemorrhaging cash also.
Just wait until the pension guarantee funding is pushed through in the dark of night (lets say 2 am) by the house of representatives. The federally constituted Pension Benefit Guaranty Corp is in default due to massive payouts for prior airline and auto bankruptcies. Unless taxpayers wise up and change the laws, we will all be paying more taxes to provide the bloated retirement benefits demanded by the syndicated unions. We will all pay for the excessive reitrement benefits of the few.
Fares need to reflect the true cost of providing the service. Airlines need to look at their fare structure as it relates to actual mileage on each leg. Many times I can fly to LA from NY for less than Buffalo to Albany or Buffalo to Chicago. I took a trip to England a few years (5) back and the price for 2 people was less than a walk up ticket Buffalo-Chicago. That makes no sense whatsoever regardless of how far in advance I made my reservation.
As I now refuse to fly for any trips that I can drive in under 10 hours I guess I don't have a dog in this fight.
Its been a long time since anything was sold based on its true cost. In today's environment, you sell for what you can get.
Well it looks like it didn't work for many airlines. You cannot give the workers all sorts of benefits, pay for all the regulations, pay for rising fuel prices and still fly a plane 2,000 miles and charge less than flights of 500 miles for any extended period of time. Eventually you'll run out of money and they did.
Keep changing your flight maybe you'll eventually get there for free. I can't explain their pricing. Is it possible they spend too much time at high altitudes with limited oxygen?
"Delta is apparently not competitive on that route."
That explains Delta's 100% load factor from DC to ATL last weekend. Obviously if Delta is overbooking its airplanes at $138, a basic college sophomore microeconmics class suggests the price is too low.
The mistaken assumption you are making is that AirTran and US Airways are charging a microeconmically sound price, and that AirTran and US Airways are covering their costs. My personal guess is AirTran is loosing its shirt, and instead of using low prices to fill its seats for a given day (an airline has a limited product, and once it has sold its seats, it cannot sell more), instead AirTran is keeping prices low to cause financial damage to its competitors (i.e., "dumping"). In a duopoly market like Atlanta, this should be considered anticompetitive. It is just hard for the government to consider a "small" AirTran (market cap $960M) taking anticompetitive action against a "large" Delta (market cap $148M), or a "small" JetBlue (market cap $2B) against a "large" United (market cap $70M).
I remember when people complained about dumping when it was cheap Japanese cars and the damage caused was to American car companies.
But today, the same penny-wise, pound-foolish Americans love unrealistically low airline fares will be complaining when the Deltas, Uniteds, Northwests, and Americans pull out of their mid-sized cites. Service to mid-sized cities will be the first casualties of legacy carrier bankruptcy restructuring. The complaints will be loud when the lack of airline service means driving three hours to a major airport, but will get even lounder, when lack of air service results in corporations deciding against putting new plants in their towns.
The chickens will come home to roost. And the politicians who subsidized so-called low-cost carriers into their mid-sized cities will react with surprise when the low-cost carriers pull out of their cities shortly after the legacy carriers depart. Then they will start demanding the federal government subsidize air carriers to fly into their cities.
I guess they were having a "going out of business" sale.
To some point, yes. I believe the federal government needs to set a floor for any city-pair ticket price. That floor should be based on the cost per revenue seat mile (not including fuel) for the industry cost leader (based on real costs, not funny-money like deferred airplane payments). These costs are known due to quarterly SEC filings.
Then add in the fuel cost per RSM, perhaps updated monthly.
The more efficient the airline, the more profit it makes for its shareholders. Or offfer better service to your customers at the same price as the competition. Make yourself more efficient, the RSM costs drop, the feds lower the price floor, and you get an even bigger financial advantage over your competitor. The less efficient the airline, the more money it loses. The motivation is there to improve efficiency.
While I generally oppose regulation, such a proposal would end the bleeding contests which have typified the airline industry since the 1980s.
The reality about the airline industry is it is dominated by duopoly competition between major city pairs. Duopolies, as much as monopolies, are inherently anticompetitive, and should be regulated for similar reasons monopolies are regulated.
I had a microeconmics professor back in the 1980s who's specialty was duopoly. Guess what he studied? The airline industry. American Airlines and Braniff in Dallas Fort Worth was a regular microeconmics petri dish of duopoly.
The conclusion my professor came to was any duopoly will almost always result in great harm to both firms until one dies, resulting in a monopoly.
So if duopolies naturally evolve into monopolies, and monopolies are anticompetitive and require regulation, duopolies should be regulated as well.
"Unless taxpayers wise up and change the laws, we will all be paying more taxes to provide the bloated retirement benefits demanded by the syndicated unions. We will all pay for the excessive reitrement benefits of the few."
This almost seems like a Catch-22. The syndicated unions in Big Business demand better pension benefits (which are not nearly as much $$$ as Government pensions, BTW), yet people think they are greedy to demand it. The big businesses then default their pension responsibility (because big business wants to retain its bottom line), to the federally constituted Pension Benefit Guaranty Corp which is paid for by us taxpayers, which turns a private pension fund into a public socially funded pension fund.
This is turning our country into socialism, not unlike the national health care fiasco. The thing is, unless taxpayers band together (in some form of a union or group), it is difficult to accomplish anything. It is one thing to pay lip service to this pension issue, and another to do something about it.
You are correct, but they will all file by Oct. 17 when the new bankruptcy code goes into effect. The new code is not nearly as "CEO friendly" as the current Code. Trust me, if any big company is toying with filing, they will do it within the month.
Thanks for your time.
You might notice a trend toward smaller airplane manufacturing such as the 737. The 757 line has shut down. Very few 747's are being built and the 767 line is almost down. Airbus has the big A380 albatross and Boeing is placing its bets on smaller more fuel efficient airplanes.The new 787 should be the most fuel efficient of all.
This falls in line with point to point service versus hub and spoke that Airbus is counting on. This would mean more service to smaller airports in this country if Boeing is correct in their assumption. This might indicate that the major carriers with their big planes may be going out of business and the smaller Southwest models will thrive in the near future.
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