- Dec 5, 2003
- 21,709
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Although it has come as a surprise to many people, Delta has avoided bankruptcy in the near term, if not the long term. Grinstein and his management team have extracted large cost cuts through their doom and gloom rhetoric. They have obtained at least $1.5 billion of cost cuts from their ongoing employees and then significant amounts more from the shrinking of the workforce and closing of DFW as a hub. They have pushed back maturities on approx. $400 million worth of debt but have not reduced the overall amount - which still amounts to $20 billion when pension liabilities are included. DL employees will not have defined pension benefits any longer (it is very likely they will reduce the transition window for non-contract employees). The medium and long-term portions of the debt restructuring have not been successful, although ending the debt swap efforts will release nearly a billion dollars of collateral back to DL for other uses.
By not going into bankruptcy, DL has passed on the opportunity to turn over its pension liabilities to the government even though they are second only to UA. They also lost the ability to wipe out several billion dollars worth of unsecured debt which could have been eliminated in bankruptcy. Apparently, DL execs fully recognize that the survival rate for airlines in bankruptcy is very low and they would rather cut deeper and pay off their debts than dramatically increase the likelihood of bringing the company to an end. DL will pay as much as $1.5 billion in interest and pension payments over the next several years, an amount that is very large but certainly possible. Because the amount of debt service is largely fixed, DL can increase its financial flexibility only by increasing revenue, a task that is very difficult for DL given its network.
Competitively, DL is retrenching to the east where even AirTran is indicating that it is not as interested as competing as it once was (statements like DL being irrational by adding more capacity to the world's largest hub). US' pullbacks and shifts to international markets do provide DL with some breathing room in domestic markets. Independence's likely pullback from some of the point to point Florida markets will only help Delta - as well as US.
While DL employees clearly have taken a haircut, they still are at average pay levels for now. They also are getting nearly 1/3 of the company's stock - by far the largest of any of the legacy carriers.
The current management team seems to recognize the core requirements for running an airline despite the example two administrations left, making serious missteps unlikely. DL's costs should be near the bottom of the legacy industry - where DL historically has been, a position that enabled them to make money despite a less-premium revenue focused network than other carriers.
Delta is challenged, however. The east coast will continue to be a blood bath - particularly as US fights for survival and a number of carriers try to push them over the edge. Domestically, DL is stuck to largely slug it out in the east with an obvious focus on expanding from NYC and defending ATL and Florida. DL can hold its own in SLC and CVG but those are not likely to be growth markets. In the event US successfully restructures, they will be a very attractive takeover target given their access to key domestic markets and their low cost components (individual employee salaries and leases). If any other carrier acquired US or its remnants, DL's strength on the east coast would be markedly reduced.
Internationally, DL has very few additional international aircraft available to deploy and no deliveries of mainline aircraft for several years (which while helping the balance sheet provides little internal growth opportunities). Further, DL's international routes are almost entirely to continental Europe and relatively open access markets in Latin America. Reportedly, some domestic 767s can be reconfigured for international use and DL might acquire some over-the-water 757s but growth will still be focused on Europe and Latin America, given the aircraft that are available. At a time when every legacy airline recognizes the value of flying more international routes, DL is poorly equipped.
DL has the advantage of having the largest RJ fleet in the world - the majority of which are owned (along with the associated debt). DL's ability to maintain corporate revenue in the face of shrinking yields has come by deploying more RJs. ASA and/or Comair could certainly be spun off to help improve DL's balance sheet while ensuring that they don't become a competitor. DL also has the lowest maintenance costs in the legacy industry, an advantage that could also allow DL to sell off its heavy maintenance operations more successfully than other carriers - esp. given its non-union status.
DL has used acquisitions very effectively to grow its network over the years. Will Delta seize the opportunity to participate in industry restructuring by acquiring another carrier? Since DL obtains the smallest percentage of revenue from international markets than any other carrier except US, will DL take the opportunity to acquire international routes esp. in limited access countries through an acquisition? Since DL has the smallest large longhaul international widebody fleet in the US industry, will DL acquire used international planes, some of which are being rejected through bankruptcy at other airlines and are cheaper than what DL would have to spend for new ones? Will DL seek to strengthen its domestic presence by acquiring a carrier with hubs in much larger markets than CVG and SLC as well as a stronger presence on the west coast?
I believe the answer to these questions is "YES" and we will see DL lead industry consolidation, if not participate strongly in it. After monetizing some of its assets mentioned above, DL will have the financial strength necessary to particpate in consolidation - as does AA and potentially NW. CO, NW, and UA could all potentially be good acquisitions for DL but UA is clearly most in play at the moment. Is the time for industry consolidation now upon us?
What do you think Delta does next?
By not going into bankruptcy, DL has passed on the opportunity to turn over its pension liabilities to the government even though they are second only to UA. They also lost the ability to wipe out several billion dollars worth of unsecured debt which could have been eliminated in bankruptcy. Apparently, DL execs fully recognize that the survival rate for airlines in bankruptcy is very low and they would rather cut deeper and pay off their debts than dramatically increase the likelihood of bringing the company to an end. DL will pay as much as $1.5 billion in interest and pension payments over the next several years, an amount that is very large but certainly possible. Because the amount of debt service is largely fixed, DL can increase its financial flexibility only by increasing revenue, a task that is very difficult for DL given its network.
Competitively, DL is retrenching to the east where even AirTran is indicating that it is not as interested as competing as it once was (statements like DL being irrational by adding more capacity to the world's largest hub). US' pullbacks and shifts to international markets do provide DL with some breathing room in domestic markets. Independence's likely pullback from some of the point to point Florida markets will only help Delta - as well as US.
While DL employees clearly have taken a haircut, they still are at average pay levels for now. They also are getting nearly 1/3 of the company's stock - by far the largest of any of the legacy carriers.
The current management team seems to recognize the core requirements for running an airline despite the example two administrations left, making serious missteps unlikely. DL's costs should be near the bottom of the legacy industry - where DL historically has been, a position that enabled them to make money despite a less-premium revenue focused network than other carriers.
Delta is challenged, however. The east coast will continue to be a blood bath - particularly as US fights for survival and a number of carriers try to push them over the edge. Domestically, DL is stuck to largely slug it out in the east with an obvious focus on expanding from NYC and defending ATL and Florida. DL can hold its own in SLC and CVG but those are not likely to be growth markets. In the event US successfully restructures, they will be a very attractive takeover target given their access to key domestic markets and their low cost components (individual employee salaries and leases). If any other carrier acquired US or its remnants, DL's strength on the east coast would be markedly reduced.
Internationally, DL has very few additional international aircraft available to deploy and no deliveries of mainline aircraft for several years (which while helping the balance sheet provides little internal growth opportunities). Further, DL's international routes are almost entirely to continental Europe and relatively open access markets in Latin America. Reportedly, some domestic 767s can be reconfigured for international use and DL might acquire some over-the-water 757s but growth will still be focused on Europe and Latin America, given the aircraft that are available. At a time when every legacy airline recognizes the value of flying more international routes, DL is poorly equipped.
DL has the advantage of having the largest RJ fleet in the world - the majority of which are owned (along with the associated debt). DL's ability to maintain corporate revenue in the face of shrinking yields has come by deploying more RJs. ASA and/or Comair could certainly be spun off to help improve DL's balance sheet while ensuring that they don't become a competitor. DL also has the lowest maintenance costs in the legacy industry, an advantage that could also allow DL to sell off its heavy maintenance operations more successfully than other carriers - esp. given its non-union status.
DL has used acquisitions very effectively to grow its network over the years. Will Delta seize the opportunity to participate in industry restructuring by acquiring another carrier? Since DL obtains the smallest percentage of revenue from international markets than any other carrier except US, will DL take the opportunity to acquire international routes esp. in limited access countries through an acquisition? Since DL has the smallest large longhaul international widebody fleet in the US industry, will DL acquire used international planes, some of which are being rejected through bankruptcy at other airlines and are cheaper than what DL would have to spend for new ones? Will DL seek to strengthen its domestic presence by acquiring a carrier with hubs in much larger markets than CVG and SLC as well as a stronger presence on the west coast?
I believe the answer to these questions is "YES" and we will see DL lead industry consolidation, if not participate strongly in it. After monetizing some of its assets mentioned above, DL will have the financial strength necessary to particpate in consolidation - as does AA and potentially NW. CO, NW, and UA could all potentially be good acquisitions for DL but UA is clearly most in play at the moment. Is the time for industry consolidation now upon us?
What do you think Delta does next?
