Bankruptcy court still looms
Experts: Delta pilots key even with restructuring
By James Pilcher
Enquirer staff writer
The massive restructuring and cost-cutting plan Delta Air Lines introduced Wednesday should help the financially struggling carrier reinvent itself over the long haul, experts and industry insiders say.
But the new strategy probably won't help when it comes to staving off Chapter 11 bankruptcy protection - only the company's pilot union can help at this stage, the experts say, even if the pilots say they are only part of the solution.
"The plan is a long-term step in the right direction," airline analyst Jim Higgins of Credit Suisse First Boston wrote. "But (Delta's) ability to avoid bankruptcy over a period that now appears to be weeks rather than months rests solely on its ability to obtain $1 billion in pilot concessions."
The Atlanta-based airline, which operates its second-largest hub at Cincinnati/Northern Kentucky International Airport, said Wednesday that its restructuring plan could help shave more than $2 billion more off annual costs, and coupled with a pilot agreement, that the company could save as much as $5 billion by 2006.
However, those reductions will require closing the airline's hub in Dallas, eliminating 6,000-7,000 jobs, and cutting salaries and benefits for remaining workers.
The airline also is trying to become more efficient with its planes and network, streamlining its Atlanta hub and retiring four plane types.
Delta has touted the plan as a way to reverse its fortunes - it has lost more than $5 billion in the past three years, with no end in sight.
But many of the changes in the restructuring plan won't take full effect until early next year. Meanwhile, Delta chief executive officer Gerald Grinstein said that if a retirement issue is not worked out with the pilots by the end of this month, the company will declare bankruptcy.
The company is seeking $1 billion in annual cuts from the 7,500-pilot union, which includes more than 800 locally. Grinstein said that the retirement issue could be worked out separately, but that an overall agreement was needed soon, saying his inability to get an agreement with the pilot union was "a deep personal disappointment."
Officials with Delta's branch of the Air Line Pilots Association disagree that avoiding Chapter 11 is entirely contingent upon the union agreeing to concessions.
"This needs to be a comprehensive restructuring involving all stakeholders, and employees are only a part of that," union spokesman Chris Renkel said Thursday. "And the company is working on it, but there is a long way to go."
Delta has approached some of its bond holders to renegotiate its debt, and Grinstein said Wednesday that it was in "fruitful" discussions with holders of about 25 percent of that debt.
But just the fact that such a deadline was given on a part of the deal prompted one analyst to raise the chances of a Delta bankruptcy from 50 percent to 70 percent while also raising the chances of a pilot agreement.
"While seeming paradoxical, our revised thesis assumes a fast-ticking clock and the inability to extract sufficient savings from debt holders in time," Jamie Baker of JP Morgan wrote in a research note. "Bear in mind that this change has little to do with (Wednesday's) town-hall meeting, which was not meaningfully directed towards the issue of Chapter 11 avoidance."
Other experts echoed Baker's sentiments that the plan would not be enough to keep the company from the bankruptcy courts, saying what the company is asking from its pilots dwarfs any cuts coming through jobs and salaries.
According to Delta's financial statements, it had a payroll of about $6.3 billion in 2003.
Even a 10 percent cut across the board in non-pilot labor costs would be just over half of what the company is seeking from the pilots, experts say.
As for the fate of the plan if Delta does declare Chapter 11, Grinstein acknowledged that it might not survive. "We obviously would like to keep going forward, but in bankruptcy, you're not in total control," he said.
And he said that "time is running out" when asked when the company might declare bankruptcy.
"I can't give a specific date, but our liquidity drain is continuing, and if anything alters that, the company could have no choice," Grinstein said.
Thursday on Wall Street, Delta stock lost 12 cents to close at $3.92.
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