CTS
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Chance Of Delta Ch. 11 Grows As Cash Balance Falls Aviation Daily 08/10/2005, page 04
Steven Lott
Delta's stock price took another dive yesterday to close below $2 per share after two analysts predicted that a bankruptcy filing is almost inevitable if the airline doesn't boost liquidity or win major concessions in the near future.
Merrill Lynch issued a "sell" rating on Delta's stock as record fuel prices "greatly increase the likelihood of a bankruptcy filing within the next two months." Delta has been in talks with several creditors about additional funding for months, and GE and American Express have been mentioned as possible sources. "However, during that same period, we have seen a surge in oil prices, a concern that could keep lenders on the sidelines, at least until after a bankruptcy filing," said analyst Michael Linenberg.
Linenberg estimates that every $1 increase in the price of a barrel of oil costs Delta $60 million per year. With prices continuing to rise, Delta's fuel bill could jump by more than $1 billion, completely offsetting the $1 billion cost concession the airline won from its pilots last year. In the three weeks since Delta reported a second-quarter loss, Linenberg calculates that the jump in fuel prices cost the company $400 million.
Credit Card Contracts Expiring
The Atlanta carrier finished the second quarter with $1.7 billion in cash, but Linenberg feels a drop to about $1.3 billion could trigger a Chapter 11 filing. If fuel didn't provide a large enough problem, Delta faces the expiration of its Visa and MasterCard processing contracts this month. "A renewal or replacement contract could stipulate a large cash holdback to cover the processor's exposure to tickets sold but not yet flown," Linenberg said, and the holdback could be as much as $400 million.
Delta was expected to file its full quarterly report yesterday with the Securities & Exchange Commission but told the SEC it has delayed the filing as it is in negotiations with a third party to serve as its new credit card processor. The current contract expires Aug. 29. "The potential Visa/MasterCard processor has advised [Delta] that it will require a significant cash reserve, deposited with the processor immediately upon start of the new contract, for tickets purchased using Visa or MasterCard but not yet flown." The airline is "exploring alternatives to offset a portion of the cash reserve, but there can be no assurance whether or when it can implement any such alternative."
Delta is still looking at selling one of its regional subsidiaries, with Atlantic Southeast the most likely candidate. The airline also will likely go after more labor concessions to save money. JP Morgan analyst Jamie Baker predicts the airline will ask for $225 million more from pilots and $175 million from all management and other employee groups. "We know the pilots are overpaid to the tune of 10%-15% relative to the low end of the pilot-pay spectrum, equating to about $225 million according to our calculations," he said.
In another surprising move, Scott Yohe, Delta's long-time head of government affairs quietly retired Aug. 1. Yohe has been with Delta for 26 years and is in the middle of a fight to win pension reform from Congress. Even though he officially retired, Yohe has been retained as a consultant and still leads Delta's Washington office. Delta does not expect to replace Yohe in the near future. -SL
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I hope this is a poorly written article. I think there should be a new paragraph after the ASA comment. I don't think they can get 225million from ASA pilots even if we worked for free.
CTS
Steven Lott
Delta's stock price took another dive yesterday to close below $2 per share after two analysts predicted that a bankruptcy filing is almost inevitable if the airline doesn't boost liquidity or win major concessions in the near future.
Merrill Lynch issued a "sell" rating on Delta's stock as record fuel prices "greatly increase the likelihood of a bankruptcy filing within the next two months." Delta has been in talks with several creditors about additional funding for months, and GE and American Express have been mentioned as possible sources. "However, during that same period, we have seen a surge in oil prices, a concern that could keep lenders on the sidelines, at least until after a bankruptcy filing," said analyst Michael Linenberg.
Linenberg estimates that every $1 increase in the price of a barrel of oil costs Delta $60 million per year. With prices continuing to rise, Delta's fuel bill could jump by more than $1 billion, completely offsetting the $1 billion cost concession the airline won from its pilots last year. In the three weeks since Delta reported a second-quarter loss, Linenberg calculates that the jump in fuel prices cost the company $400 million.
Credit Card Contracts Expiring
The Atlanta carrier finished the second quarter with $1.7 billion in cash, but Linenberg feels a drop to about $1.3 billion could trigger a Chapter 11 filing. If fuel didn't provide a large enough problem, Delta faces the expiration of its Visa and MasterCard processing contracts this month. "A renewal or replacement contract could stipulate a large cash holdback to cover the processor's exposure to tickets sold but not yet flown," Linenberg said, and the holdback could be as much as $400 million.
Delta was expected to file its full quarterly report yesterday with the Securities & Exchange Commission but told the SEC it has delayed the filing as it is in negotiations with a third party to serve as its new credit card processor. The current contract expires Aug. 29. "The potential Visa/MasterCard processor has advised [Delta] that it will require a significant cash reserve, deposited with the processor immediately upon start of the new contract, for tickets purchased using Visa or MasterCard but not yet flown." The airline is "exploring alternatives to offset a portion of the cash reserve, but there can be no assurance whether or when it can implement any such alternative."
Delta is still looking at selling one of its regional subsidiaries, with Atlantic Southeast the most likely candidate. The airline also will likely go after more labor concessions to save money. JP Morgan analyst Jamie Baker predicts the airline will ask for $225 million more from pilots and $175 million from all management and other employee groups. "We know the pilots are overpaid to the tune of 10%-15% relative to the low end of the pilot-pay spectrum, equating to about $225 million according to our calculations," he said.
In another surprising move, Scott Yohe, Delta's long-time head of government affairs quietly retired Aug. 1. Yohe has been with Delta for 26 years and is in the middle of a fight to win pension reform from Congress. Even though he officially retired, Yohe has been retained as a consultant and still leads Delta's Washington office. Delta does not expect to replace Yohe in the near future. -SL
___________________________________________________________________________
I hope this is a poorly written article. I think there should be a new paragraph after the ASA comment. I don't think they can get 225million from ASA pilots even if we worked for free.
CTS
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