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Analysts Bearish on Delta

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701EV

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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.

Optimistic industry observers still think Delta can avoid Chapter 11 if management quickly gets a long-sought pay cut deal with pilots.

T. LEVETTE BAGWELL / Staff
CEO Gerald Grinstein has laid out a deadline for pilots.
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But a number think Chapter 11 is probable because the carrier faces an even more difficult task winning concessions from creditors and cutting huge pension liabilities. A new end-of-the-month deadline for resolving a pilot retirement issue, set by Delta CEO Gerald Grinstein on Wednesday, adds an ominous new wrinkle.

"We are increasing both our Chapter 11 probability and the likelihood of a near-term pilot solution at Delta," JPMorgan analyst Jamie Baker said in a report to investors.

Baker boosted his Chapter 11 odds from 50 percent to 70 percent after the Atlanta carrier announced plans Wednesday to cut up to 7,000 jobs and shut down its Dallas hub as part of an effort to slash an additional $2.7 billion from its annual operating costs by the end of 2006.

That plan may pay off long term, and it may help the airline get a pilot pay deal, he said, but it won't ease Delta's massive debt load.

"We simply believe the time required to extract sufficient debt relief is running out," said Baker. He thinks Delta will resolve pilot issues but then face "a mid-October drop-dead date" for an out-of-court restructuring with creditors.

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.

Delta also so far hasn't been able to restructure more of its long-term debt or noncancelable leases, which total more than $20 billion. The airline has lost more than $5 billion since 2000 and will have less than $1.5 billion in cash by midfall — a trigger point for Chapter 11, according to some analysts.

Analysts noted that the new business plan rolled out Wednesday could still be pursued even if Delta enters bankruptcy court.

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."
 

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