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Sunday, June 20, 2004
Comair's fate hinges on Delta
Options weighed for carrier if parent goes bust
By James Pilcher
Enquirer staff writer
As Delta Air Lines contemplates whether to seek bankruptcy, Comair keeps churning out money.
The Erlanger-based regional carrier's success, contrasted with Delta's recent miserable financial performance, raises the question of what would happen if its parent were to declare Chapter 11.
A bankruptcy could affect the more than 3,500 Comair employees at the Cincinnati/Northern Kentucky International Airport, Delta's second-largest hub.
Officials at Delta and Comair won't discuss the bankruptcy question. Comair refers questions to Delta, where officials say bankruptcy remains the last option.
But experts and analysts see three likely scenarios in the event of a Delta bankruptcy:
• Comair is included in the restructuring under the Chapter 11 umbrella, since it is part of the entire Delta Air Lines Inc. corporation. Experts say this is the most likely outcome in the event of a Delta bankruptcy, which raises the possibility of Comair restructuring its labor contracts, most notably with its pilots - who went on a three-month strike in 2001.
• Comair is spun off either as a privately held or publicly traded company. It essentially would be sold to raise cash for Delta.
• Delta retains Comair and its other subsidiaries but does not include the smaller airlines in the restructuring. That could lead to some interesting situations, such as Delta pension fund managers looking to raid Comair's assets.
Comair and Delta officials also would not comment on Comair's financial information. All large airlines are required by federal regulation to submit financial data to the U.S. Department of Transportation, but such filings are not audited, unlike those sent to the Securities and Exchange Commission.
SEC filings also don't break out financials for subsidiaries (Delta bought Comair, which was previously a public company, for $1.91 billion in January 2000).
In 2003, Comair earned more than $88 million in net profit on more than $1 billion in revenue, according to Transportation Department statistics. In the first quarter of this year, its net income was $8.4 million on more than $250 million in revenue.
In an interview Thursday, Delta's senior vice president and chief of operations, Joe Kolshak, declined to speculate on what would happen to subsidiaries such as Comair or sister airline ASA, also owned by Delta, under a bankruptcy.
"All I can say is ... without concessions from the (Delta) pilot group, Chapter 11 remains an option," said Kolshak, who also oversees the airline's regional carriers. "But it would be absolutely our last possible option."
Bankruptcy unlikely
Analysts and experts say that a Delta bankruptcy is unlikely because they believe its pilots will eventually acquiesce to the company's demands for deep concessions at the very last possible minute before Chapter 11 is needed. They cite the situation at American Airlines, where unions agreed to cuts just days before American was to declare bankruptcy.
Regional airline analyst Robert Ashcroft of UBS Investment Research, along with airline consultant Michael Boyd, president of the Colorado-based The Boyd Group, say that while unlikely, a Delta bankruptcy would include Comair, despite its apparent profitability.
"There is precedent to this, and usually when a corporation undergoes bankruptcy reorganization, the subsidiaries are included in that," said Ashcroft, pointing to the recent example of US Airways and its three wholly owned regional airlines: Piedmont, Allegheny and PSA.
All three were included in US Airways' restructuring last year.
"And one might raise the question that if ASA and Comair are profitable, why would they go into bankruptcy," Ashcroft continued. "Profits at those regionals and other wholly-owned subsidiaries are completely notional. Delta is free to arrange those contracts and books any way it wants, and can make them look as profitable or unprofitable as it likes."
More leverage
If Delta were to include Comair in any restructuring, it would give management at both airlines much more leverage in renegotiating or even possibly voiding existing contracts.
Comair's pilots, who went on an 89-day strike in 2001, are now considered the highest-paid in the regional industry, as are the flight attendants - the airline's mechanics also are unionized.
The labor rates have made Comair's costs some of the highest in the regional industry. In the first quarter of this year, Comair recorded $262.9 million in operating expenses, third-highest among major regionals. The rate of 11.58 cents to fly one passenger one mile, however, is one of the lowest.
Under bankruptcy protection, the company could ask to renegotiate the deals, using the threat of filing what is called a Section 11-13, or asking the bankruptcy judge to void existing contracts and impose wages that are more in line with the rest of the market.
J.C. Lawson III, chairman of Comair's branch of the Air Line Pilots Association, would not comment on potential bankruptcy and its possible impact on labor contracts. Comair has already asked its pilot and flight attendant unions for concessions to cut costs to receive new jets from Delta. The pilots said no, and Comair will not get any new jets next year, the first time in the 26-year history of the company that it has not added to its fleet.
Bankruptcy "definitely would give the management more leverage, and I always tell unions that it's better to negotiate a deal outside of bankruptcy than be under Chapter 11," said Boyd, who consults with unions as well as airlines, and who has done customer service training for Comair.
This was the situation at US Airways, which went to unions at all three subsidiaries for concessions. PSA got the most cuts from its pilots. Now, PSA is the only one of US Airways' three wholly owned subsidiaries flying regional jets. The other two - Piedmont and Allegheny - are now being merged and will handle smaller routes and fly turboprops, as opposed to the more lucrative regional jets.
"They essentially had a bakeoff, which could be the situation at Delta," Ashcroft said. "And PSA got the most cuts and came out the winner."
Problems loom
The other two scenarios have their attractions, the experts say, but also pose more potential problems.
If Comair were spun off through an initial public offering or sold outright to private investors to raise cash for Delta, the parent could have a hard time selling. That's because impending bankruptcy or current bankruptcy would make the contracts with Delta all but meaningless, since they would be restructured as well.
At this stage, however, Ashcroft believes that any spin-off is unlikely until Delta's financial situation stabilizes.
And keeping Comair and its sister ASA out of bankruptcy could simplify matters - or make it even more complicated. Since Comair is profitable on paper, creditors could line up to take a slice of those profits (including Delta employees' own pension funds). In addition to the airline, Comair technically owns Delta AirElite, Delta's high-end charter service, as well as a well-established flight school in Florida - Delta Connection Aviation Academy.
In addition, Delta creditors are likely to want ASA and Comair creditors to share in the financial pain, Ashcroft said.
Finally, Delta also could be forced to renege on its contracts that set the rates it pays regionals such as Comair to carry Delta passengers.
"Creditors of mainline Delta are going to want to have access to as many of Delta's assets as possible," Ashcroft said. "That includes Comair and ASA, and that's why both are likely to be included as bankrupt entities as part of any Delta restructuring."
E-mail [email protected]
Comair's fate hinges on Delta
Options weighed for carrier if parent goes bust
By James Pilcher
Enquirer staff writer
As Delta Air Lines contemplates whether to seek bankruptcy, Comair keeps churning out money.
The Erlanger-based regional carrier's success, contrasted with Delta's recent miserable financial performance, raises the question of what would happen if its parent were to declare Chapter 11.
A bankruptcy could affect the more than 3,500 Comair employees at the Cincinnati/Northern Kentucky International Airport, Delta's second-largest hub.
Officials at Delta and Comair won't discuss the bankruptcy question. Comair refers questions to Delta, where officials say bankruptcy remains the last option.
But experts and analysts see three likely scenarios in the event of a Delta bankruptcy:
• Comair is included in the restructuring under the Chapter 11 umbrella, since it is part of the entire Delta Air Lines Inc. corporation. Experts say this is the most likely outcome in the event of a Delta bankruptcy, which raises the possibility of Comair restructuring its labor contracts, most notably with its pilots - who went on a three-month strike in 2001.
• Comair is spun off either as a privately held or publicly traded company. It essentially would be sold to raise cash for Delta.
• Delta retains Comair and its other subsidiaries but does not include the smaller airlines in the restructuring. That could lead to some interesting situations, such as Delta pension fund managers looking to raid Comair's assets.
Comair and Delta officials also would not comment on Comair's financial information. All large airlines are required by federal regulation to submit financial data to the U.S. Department of Transportation, but such filings are not audited, unlike those sent to the Securities and Exchange Commission.
SEC filings also don't break out financials for subsidiaries (Delta bought Comair, which was previously a public company, for $1.91 billion in January 2000).
In 2003, Comair earned more than $88 million in net profit on more than $1 billion in revenue, according to Transportation Department statistics. In the first quarter of this year, its net income was $8.4 million on more than $250 million in revenue.
In an interview Thursday, Delta's senior vice president and chief of operations, Joe Kolshak, declined to speculate on what would happen to subsidiaries such as Comair or sister airline ASA, also owned by Delta, under a bankruptcy.
"All I can say is ... without concessions from the (Delta) pilot group, Chapter 11 remains an option," said Kolshak, who also oversees the airline's regional carriers. "But it would be absolutely our last possible option."
Bankruptcy unlikely
Analysts and experts say that a Delta bankruptcy is unlikely because they believe its pilots will eventually acquiesce to the company's demands for deep concessions at the very last possible minute before Chapter 11 is needed. They cite the situation at American Airlines, where unions agreed to cuts just days before American was to declare bankruptcy.
Regional airline analyst Robert Ashcroft of UBS Investment Research, along with airline consultant Michael Boyd, president of the Colorado-based The Boyd Group, say that while unlikely, a Delta bankruptcy would include Comair, despite its apparent profitability.
"There is precedent to this, and usually when a corporation undergoes bankruptcy reorganization, the subsidiaries are included in that," said Ashcroft, pointing to the recent example of US Airways and its three wholly owned regional airlines: Piedmont, Allegheny and PSA.
All three were included in US Airways' restructuring last year.
"And one might raise the question that if ASA and Comair are profitable, why would they go into bankruptcy," Ashcroft continued. "Profits at those regionals and other wholly-owned subsidiaries are completely notional. Delta is free to arrange those contracts and books any way it wants, and can make them look as profitable or unprofitable as it likes."
More leverage
If Delta were to include Comair in any restructuring, it would give management at both airlines much more leverage in renegotiating or even possibly voiding existing contracts.
Comair's pilots, who went on an 89-day strike in 2001, are now considered the highest-paid in the regional industry, as are the flight attendants - the airline's mechanics also are unionized.
The labor rates have made Comair's costs some of the highest in the regional industry. In the first quarter of this year, Comair recorded $262.9 million in operating expenses, third-highest among major regionals. The rate of 11.58 cents to fly one passenger one mile, however, is one of the lowest.
Under bankruptcy protection, the company could ask to renegotiate the deals, using the threat of filing what is called a Section 11-13, or asking the bankruptcy judge to void existing contracts and impose wages that are more in line with the rest of the market.
J.C. Lawson III, chairman of Comair's branch of the Air Line Pilots Association, would not comment on potential bankruptcy and its possible impact on labor contracts. Comair has already asked its pilot and flight attendant unions for concessions to cut costs to receive new jets from Delta. The pilots said no, and Comair will not get any new jets next year, the first time in the 26-year history of the company that it has not added to its fleet.
Bankruptcy "definitely would give the management more leverage, and I always tell unions that it's better to negotiate a deal outside of bankruptcy than be under Chapter 11," said Boyd, who consults with unions as well as airlines, and who has done customer service training for Comair.
This was the situation at US Airways, which went to unions at all three subsidiaries for concessions. PSA got the most cuts from its pilots. Now, PSA is the only one of US Airways' three wholly owned subsidiaries flying regional jets. The other two - Piedmont and Allegheny - are now being merged and will handle smaller routes and fly turboprops, as opposed to the more lucrative regional jets.
"They essentially had a bakeoff, which could be the situation at Delta," Ashcroft said. "And PSA got the most cuts and came out the winner."
Problems loom
The other two scenarios have their attractions, the experts say, but also pose more potential problems.
If Comair were spun off through an initial public offering or sold outright to private investors to raise cash for Delta, the parent could have a hard time selling. That's because impending bankruptcy or current bankruptcy would make the contracts with Delta all but meaningless, since they would be restructured as well.
At this stage, however, Ashcroft believes that any spin-off is unlikely until Delta's financial situation stabilizes.
And keeping Comair and its sister ASA out of bankruptcy could simplify matters - or make it even more complicated. Since Comair is profitable on paper, creditors could line up to take a slice of those profits (including Delta employees' own pension funds). In addition to the airline, Comair technically owns Delta AirElite, Delta's high-end charter service, as well as a well-established flight school in Florida - Delta Connection Aviation Academy.
In addition, Delta creditors are likely to want ASA and Comair creditors to share in the financial pain, Ashcroft said.
Finally, Delta also could be forced to renege on its contracts that set the rates it pays regionals such as Comair to carry Delta passengers.
"Creditors of mainline Delta are going to want to have access to as many of Delta's assets as possible," Ashcroft said. "That includes Comair and ASA, and that's why both are likely to be included as bankrupt entities as part of any Delta restructuring."
E-mail [email protected]
