- Nov 9, 2003
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Nitty Gritty
Aviation Week & Space Technology
08/16/2004, page 34
David Bond
Washington
Delta and US Airways are running low on options in their struggles to stay out of bankruptcy court
Like American Airlines 18 months ago, Delta Air Lines and US Airways are nearing the brink of a Chapter 11 bankruptcy-protection filing. And like American, which stayed solvent, the outcome at Delta and US Airways probably will turn on last-minute actions by their labor unions.
The carriers reached this point in dramatically different ways. Delta battled gamely through the past three years on the strength of non-labor cost reductions that have run out of steam, and it is slowly running out of cash. US Airways spent eight-plus months under bankruptcy-court supervision during 2002-03, and it is paying an escalating price for its inability to satisfy commitments it made for the credit that took it out of Chapter 11.
Delta started saying in the spring that it might have to file for bankruptcy protection if it didn't get concessions from its pilots, its only unionized workforce, but now it says there is no more uncertainty. "If we cannot make substantial progress in the near term toward achieving a competitive cost structure that will permit us to . . . access the capital markets on acceptable terms, we will need to seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code," the carrier said Aug. 9 in its second-quarter report to the Securities and Exchange Commission.
Delta Air Lines fears that failure to cut costs further will leave it with too little cash at the end of the year to survive until the spring.
The Atlanta-based airline started 2004 with a lot of cash, $2.7 billion unrestricted, but burned through $700 million of it in the first half of the year. Because of low domestic yields and high fuel costs, cash flows have been worse than expected and remain so, and in the second half, Delta thinks it will have to "use a portion of our cash reserves to pay certain obligations that we previously anticipated would be paid from cash flows from operations. Accordingly, we expect our cash and cash equivalents to decline during the remainder of 2004 at a level consistent with the decline during the first half of the year." That would put Delta close to $1.3 billion in unrestricted cash on Dec. 31, a dangerously low amount in the depths of the worst cash-flow period of a network airline's year.
With high costs, low credit ratings and few assets not already being used for collateral, Delta thinks it will take "significant reductions in our cost structure"--pay and work rule concessions by pilots, mainly--to put it in a position to borrow more. And it will need to borrow in the near term. Scheduled payments on debt, including capital leases, swell from $226 million in the second half of 2004 to $1.2 billion in 2005. This year's contributions to pension plans have mostly been made--$410 million is paid, $50 million remains--while next year's amount is uncertain, but likely substantial.
This year's pension payments had to be increased because an unusually high number of pilots are retiring early, in advance of mandatory retirement at age 60. Delta pilots can choose to take 50% of their pension benefit immediately in a lump sum, and the carrier speculated this year's early-outs fear that increasing interest rates will reduce this lump sum or that a Chapter 11 proceeding would eliminate it. About 2,000 of Delta's 6,900 pilots are at or over age 50 and thus eligible to retire, the carrier told the SEC.
US AIRWAYS FACES two immediate threats, both on Sept. 30. First, it will undergo another quarterly review of the financial covenants in the federally guaranteed loan by which it exited Chapter 11 last March. Second, interim extensions of commitments from General Electric, Bombardier and Embraer to finance purchase of regional jets expire on that date, and the carrier's progress toward reduced-cost operations will determine whether the commitments are extended (AW&ST Aug. 2, p. 26). But US Airways told the SEC Aug. 4 it "currently anticipates risk of failing to comply with these covenants and financial tests."
The loan is subject to acceleration in a default, an event that would trigger other accelerations and collapse US Airways' financial structure like a house of cards. The carrier doesn't have alternative financing for the RJs, but needs them to carry out its plans. Adding insult to injury, US Airways would have to pay up to $78 million in penalties during 2004-06 if it can't complete its RJ purchases.
In its SEC filing, US Airways also made clear why--even though it remains in distress--it is no longer considering the sale of assets, such as the Boston-New York-Washington shuttle. The answer is in the loan covenants.
AMONG TERMS of the original $1-billion loan, US Airways was to apply any proceeds from an asset sale to the principal of the loan. In March, negotiating an amendment to provide covenant relief, the carrier agreed to pay down $250 million of the loan. In return, it won the right to retain as much as 25% of net proceeds from an asset sale completed by Feb. 28, 2005. But it gave back that right in little more than two months. Effective May 21, as part of a loan amendment relaxing restrictions on using RJs as collateral in its complex dealings with GE, US Airways agreed to eliminate the provision allowing it to retain proceeds from an asset sale.
Turbulence Rising For Delta, US Airways
Unrestricted Cash, Unrestricted Cash,
12/31/03 6/30/04
Delta $2.7 billion $2 billion
Near term threat - continued cash burn, no credit available
US Airways $1.3 billion $975 million
Near term threat - failure to satisfy loan covenants, RJ financing tests
Source: Company reports
Aviation Week & Space Technology
08/16/2004, page 34
David Bond
Washington
Delta and US Airways are running low on options in their struggles to stay out of bankruptcy court
Like American Airlines 18 months ago, Delta Air Lines and US Airways are nearing the brink of a Chapter 11 bankruptcy-protection filing. And like American, which stayed solvent, the outcome at Delta and US Airways probably will turn on last-minute actions by their labor unions.
The carriers reached this point in dramatically different ways. Delta battled gamely through the past three years on the strength of non-labor cost reductions that have run out of steam, and it is slowly running out of cash. US Airways spent eight-plus months under bankruptcy-court supervision during 2002-03, and it is paying an escalating price for its inability to satisfy commitments it made for the credit that took it out of Chapter 11.
Delta started saying in the spring that it might have to file for bankruptcy protection if it didn't get concessions from its pilots, its only unionized workforce, but now it says there is no more uncertainty. "If we cannot make substantial progress in the near term toward achieving a competitive cost structure that will permit us to . . . access the capital markets on acceptable terms, we will need to seek to restructure our costs under Chapter 11 of the U.S. Bankruptcy Code," the carrier said Aug. 9 in its second-quarter report to the Securities and Exchange Commission.
Delta Air Lines fears that failure to cut costs further will leave it with too little cash at the end of the year to survive until the spring.
The Atlanta-based airline started 2004 with a lot of cash, $2.7 billion unrestricted, but burned through $700 million of it in the first half of the year. Because of low domestic yields and high fuel costs, cash flows have been worse than expected and remain so, and in the second half, Delta thinks it will have to "use a portion of our cash reserves to pay certain obligations that we previously anticipated would be paid from cash flows from operations. Accordingly, we expect our cash and cash equivalents to decline during the remainder of 2004 at a level consistent with the decline during the first half of the year." That would put Delta close to $1.3 billion in unrestricted cash on Dec. 31, a dangerously low amount in the depths of the worst cash-flow period of a network airline's year.
With high costs, low credit ratings and few assets not already being used for collateral, Delta thinks it will take "significant reductions in our cost structure"--pay and work rule concessions by pilots, mainly--to put it in a position to borrow more. And it will need to borrow in the near term. Scheduled payments on debt, including capital leases, swell from $226 million in the second half of 2004 to $1.2 billion in 2005. This year's contributions to pension plans have mostly been made--$410 million is paid, $50 million remains--while next year's amount is uncertain, but likely substantial.
This year's pension payments had to be increased because an unusually high number of pilots are retiring early, in advance of mandatory retirement at age 60. Delta pilots can choose to take 50% of their pension benefit immediately in a lump sum, and the carrier speculated this year's early-outs fear that increasing interest rates will reduce this lump sum or that a Chapter 11 proceeding would eliminate it. About 2,000 of Delta's 6,900 pilots are at or over age 50 and thus eligible to retire, the carrier told the SEC.
US AIRWAYS FACES two immediate threats, both on Sept. 30. First, it will undergo another quarterly review of the financial covenants in the federally guaranteed loan by which it exited Chapter 11 last March. Second, interim extensions of commitments from General Electric, Bombardier and Embraer to finance purchase of regional jets expire on that date, and the carrier's progress toward reduced-cost operations will determine whether the commitments are extended (AW&ST Aug. 2, p. 26). But US Airways told the SEC Aug. 4 it "currently anticipates risk of failing to comply with these covenants and financial tests."
The loan is subject to acceleration in a default, an event that would trigger other accelerations and collapse US Airways' financial structure like a house of cards. The carrier doesn't have alternative financing for the RJs, but needs them to carry out its plans. Adding insult to injury, US Airways would have to pay up to $78 million in penalties during 2004-06 if it can't complete its RJ purchases.
In its SEC filing, US Airways also made clear why--even though it remains in distress--it is no longer considering the sale of assets, such as the Boston-New York-Washington shuttle. The answer is in the loan covenants.
AMONG TERMS of the original $1-billion loan, US Airways was to apply any proceeds from an asset sale to the principal of the loan. In March, negotiating an amendment to provide covenant relief, the carrier agreed to pay down $250 million of the loan. In return, it won the right to retain as much as 25% of net proceeds from an asset sale completed by Feb. 28, 2005. But it gave back that right in little more than two months. Effective May 21, as part of a loan amendment relaxing restrictions on using RJs as collateral in its complex dealings with GE, US Airways agreed to eliminate the provision allowing it to retain proceeds from an asset sale.
Turbulence Rising For Delta, US Airways
Unrestricted Cash, Unrestricted Cash,
12/31/03 6/30/04
Delta $2.7 billion $2 billion
Near term threat - continued cash burn, no credit available
US Airways $1.3 billion $975 million
Near term threat - failure to satisfy loan covenants, RJ financing tests
Source: Company reports
