Analysts Bearish On Delta

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Analysts bearish on Delta
Bankruptcy ticks closer as pilots, creditors hold out

By RUSSELL GRANTHAM
The Atlanta Journal-Constitution
Published on: 09/10/04


Some Wall Street analysts are raising their bankruptcy odds for Delta Air Lines, citing pitfalls that are likely to trip the carrier well before its new turnaround plan generates savings.

Vaughn Cordle, an analyst with Airline Forecasts, thinks Delta has an 80 percent chance of filing Chapter 11 this month. A pilot pay deal is unlikely, he said, and Chapter 11 is Delta's only realistic avenue to reduce billions of dollars in debt and long-term leases.

Delta is "building a very strong case that they need to file bankruptcy," said Cordle, by squeezing costs from nonunion employees and other operations while being rebuffed by creditors and pilots.

The pilots union has offered annual wage and other cuts worth about $700 million, but Grinstein insists Delta must get $1 billion.

Adding to the feeling that odds of a Chapter 11 case are rising was Grinstein's Sept. 30 deadline for stemming a costly wave of early retirements among pilots.

He said that "if the pilot early retirement issue is not resolved before the end of the month, or if all the pieces don't come together in the near term, we will have to restructure through the courts."

Several hundred pilots have taken early retirement this year, under a plan that allows them to collect half their benefits in a lump sum. The retirements also complicate scheduling and create a need for expensive training of pilots moved into the retirees' old slots.

Up to 2,000 more pilots are eligible to retire early, Grinstein said Wednesday, raising the risk that the airline could ground flights because of a staffing shortage.

Last month 71 took retirement, below previous months' totals. Pilots can retire on the first day of the month, giving as little as one day's notice.

Grinstein said the airline made a "series of proposals" to the union aimed at mitigating the issue but declined to be specific. Earlier this year, the union agreed to work rule changes aimed at reducing the problem.

Union officials said Delta has so far refused to guarantee the future availability of lump-sum payments.

Mark Streeter, a debt securities analyst for JPMorgan, said he will raise his odds of a bankruptcy, currently about 50-50, if jet fuel prices stay high or if it appears that many pilots will retire this month.

Meanwhile, U.S. Rep. Mac Collins (R-Ga.) says Delta might have avoided its latest round of job and pay cuts if it had taken the pilots' pay cut offer months ago.

Collins, whose 8th District includes metro Atlanta's southern suburbs, wrote a letter to Grinstein saying he he is "disturbed" by the new job cuts and questioning the airline's negotiating strategy.

"While I am not proficient in every aspect of Delta's daily operations," Collins wrote, "I am aware that the very reasonable concessions offered more than a year ago to Delta by the pilots may have created a more stable financial condition today, had they been accepted."
 
Madame butterFLY,
There is so much hysteria in the media regarding the airlines that few people are rationally considering what is happening. Alaska announces they are cutting nearly 10% of the workforce and contracting work out and Wall Street fails to get excited.
DAL did a poor job of communicating the specific values of its initiatives and is being panned for the lack of information. That doesn't change the rationale for why DL will ultimately prevail in its attempt to cut costs outside of bankruptcy: no one will do better in bankruptcy than out and ultimately all will fair much worse. DL also knows that a US bankruptcy filing this weekend will quickly dump more bad debt and aircraft on the market - something that no investor will want to repeat w/ DL (and the aviation financing club is relatively small).
What all of the investors want is an agreement w/ the pilots. While the senior pilots can bail out and take their lump sum payment, that strategy only works for about 1/3 of DL's pilots. Most of the rest of the pilots have a considerable interest in seeing DL survive and restructure rather than end up in BK; the reason why the negotiation process has taken so long is because the most senior pilots have been pitted against everyone else - Jerry has made it clear the climax is coming and the company is willing to find a compromise that will meet the needs of both groups as long as all pilot costs come down.

Sept. 04 will go down as the most financially turbulent month in the industry because the individual airlines are working through their problems different but Wall Street hasn't yet been able to see a difference between legacy airline strategies; up to now, airline strategies and stock performance have been characterized as either "legacy" or "LCC". The divergence within each of those categories will begin in the near future.

DL will prevail in its cost cutting effort outside of bankruptcy because it is the only rational thing to do for every stakeholder. DL is also doing something far more aggressive than any other carrier and therefore the skepticism will be there.

Where you been flying recently, FLY?