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
Would you hazard a wild guess as to what Jet Blue might be paying for fuel these days? In their last 10-Q, they predicted an operating margin of 5-7% if fuel was at $1.59. In the first quarter of 2005, their average cost was $0.97, and in the second quarter they paid an average of $1.50. In the second quarter their operating margin was 9.1%.
The sick sister airlines need to downsize or go out of business.
Speaking as one of 'they', we aint giving another dime.
Captains get more than that. (I'm a right-seater) But you got the work week right.
And Delta while thinking US Airways? Neither carrier here was involved in what you were thinking about; it was US Airways and America West. At least you posted this to three different threads.
"'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.'"
Could this be one way of leveling the playing field for Delta? Declare bankruptcy like other major carriers, have their debt forgiven by the courts, shift their pension payment responsibility, along with all the other economic benefits associated with bankruptcy. Almost seems like a well-planned strategic business move?
I watched Gerald Grinstein turn around Burlington Northern in the early 1990s, to the point where they were able to acquire the Santa Fe Railway, and BNI is now the most profitable railroad in the country. If Gerry couln't pull the rabbit out of the hat, nobody could.
According to Delta.com:
Your SkyMiles are secure – The award-winning SkyMiles program has not been affected, and you can continue to enjoy the program’s benefits—including Delta Crown Room Clubs®, double miles on qualifying purchases with the Delta SkyMiles Credit Card from American Express, and the opportunity to earn and redeem miles on the thousands of flights offered by SkyTeam and our vast network of global airline alliances.
Yep. Wait till GM pulls this off - that will cause an earthquake.
Just curious what you think of the Boeing machinists who are on strike, not because of an economic or benefit package, but because of perceived disrespect paid to them by management. How far can management push employees until they strike or are employees just expected to take abuse from management?
Dunno, never worked for a union shop. Outsside of MSU, I guess - and that was silly.
This might become a trend for big business. Declare bankruptcy, get your debt forgiven and shift pension responsibility. Who ends up paying for it? The debtors and the employees and then ultimately the taxpayer.
The key is "perceived disrespect." Boeing machinists are well paid, have an interesting job, and are using the "disrespect" claim as a cover for their real reason for striking. Now that Boeing has finally started recovering its market share, the union thought that they could strike when the iron was hot and extract salary concessions from Lazy B. It aint going to happen and since the strike is almost three weeks old, they will likely come out on the short end of the stick.
"might become" a trend? "Has Become" is more accurate.
But whenever they strike, they always lose $$$. They never get ahead economically. Why do you think they continue to go on strike each time?
The major turning point occurred when the head of the Miami local of the AMA, Charlie Bryan, tried to force Frank Borman's hand at Eastern. He succeeded in getting Borman to step aside, but then had to face Frank Lorenzo. The rest was history.
Contrary to legacy airline management belief, you cannot lose $100 per ticket sold and make it up in volume.
Right now, on Orbitz, a round trip ticket from Atlanta to D.C. is about $145. To rent a car for two days and drive there and back would cost about $230 ($50/day for the car, 30 mpg, and $3/gal for gas) and take sixteen additional hours (another $210 at the average salary after taxes). For a family of four going on vacation, an increase in airline ticket price would probably cause one to drive. But for the typical business customer, the ticket price could double and it would still be cheaper to fly.
It is better to have a smaller customer base and be profitable, than have a larger customer base and loose money. This is the secret of Southwest Airlines and other so-called low cost carriers.
For Delta, the world will not end if they have only 25 roundtrips per day between Atlanta and New York instead of 36 round trips. Unfortunately, as a result of Chapter 11, they will end up with fewer round trips than before, but at a lower average fare price than before, only making the situation worse.
The entire American airline industry is a house of cards, and somebody at the table is about to sneeze. Southwest is depending on fuel hedging which is always a temporary measure. Soon their fuel costs will double. JetBlue is financed by Airbus Industries deferred payments, which will come due soon. The legacy carriers will use bankruptcy to eliminate their pension obligations. They already have cut their labor costs below the low cost carriers (U.S. Airways has the lowest operating costs of any American carrier. Southwest airlines has the highest paid pilots of any U.S. passenger carrier).
In short, the playing field is about to be leveled. At that point, expect the next carriers facing problems to be Southwest and JetBlue.
The solution to airline problems will only come when they charge a fair price for their product based on the cost of the goods sold, and the value of the product given those costs. While that may result in a smaller traveling public, and a smaller airline industry, it will be a healthier airline industry, which is better for the traveling public.
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