Delta Can AVOID Chap 11 Filing This Year Says Grinstein...

[On Your Six]

Wow! There's a tremendous amount of conflicting information in the news about Delta and their financial outlook. Clearly recent results are not positive. I wonder what GG is referring to when he says "structural changes" - could this refer to jettisoning DCI (spin off or sell off but maintain operational/feed benefits)?

Seems like a lot of conflicting information and guesswork at the moment. I don't think Chap 11 would be such a bad thing if the debt could be restructured... It should be interesting...



CEO: Delta can avoid Chapter 11 filing this year
By Marilyn Adams, USA TODAY
Delta Air Lines CEO Gerald Grinstein said Monday that he has no plans to close an airport hub or to ask the pilots union for more pay cuts to avert a possible bankruptcy filing later this year.
Delta, the USA's No. 3 carrier, lost $1.1 billion last quarter after losing an industry record $5.2 billion in 2004. The airline has warned that a cash crunch late this year might force a Chapter 11 filing. (Related story: Delta warns of substantial losses for rest of year)

But in an interview with USA TODAY, Grinstein said no drastic new cost cuts are necessary.

"Our plan is to make structural changes to the airline, rather than temporary changes," he said.

Grinstein, 72, had been a longtime member of the Delta board when he was tapped to replace former CEO Leo Mullin. He has held the top job since January 2004.

Delta narrowly averted a bankruptcy filing late last year by negotiating $1 billion a year in cuts from its pilots union, borrowing to raise cash and other steps.

It recently closed its hub at Dallas/Fort Worth airport and is cutting 7,000 jobs companywide. It has simplified its fares and reorganized the schedule at its giant Atlanta hub airport to get more flights out of the same planes.

But Delta has been hit hard by record fuel prices this year and brutal fare competition on its domestic routes.

It's facing $3.1 billion in pension payments in the next three years. To raise cash, it's considering selling assets such as one or both of its wholly owned regional carriers, Cincinnati-based Comair and Atlanta-based Atlantic Southeast.

In a research note in late April, Calyon Securities airline analyst Ray Neidl estimated Delta is burning through $4 million in cash a day. At that rate, he said, Delta's cash would dwindle to a dangerously low $466 million by year's end. "Delta appears to be the most likely candidate for a bankruptcy filing this year based on its liquidity position," Neidl said.

Delta competitors United Airlines and US Airways have opted for bankruptcy protection as they attempt to restructure.

Following US Airways' lead, United is seeking to terminate its costly pension plans, which would give it an advantage over competitors.

"It's troubling to see one set of rules for one company," Grinstein said of United. Yet Grinstein says he does not regret the decision not to seek Chapter 11 protection last year and thinks bankruptcy this year is avoidable.

CFO Michael Palumbo, who was also interviewed, said he could not predict when Delta would have to decide whether to file.

He declined to talk in detail about how Delta would raise financing to continue operating in bankruptcy. Virtually all of Delta's collateral already has been pledged to lenders to raise cash.

Delta's cost-cutting plans are having an impact, however, the executives said. This year, Delta will spend $2 billion less cash than in 2004, and spending will drop an additional $1 billion next year.

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[General Lee]

The SEC filing said differently. That is odd. I would think the best form of action now would be to sell off ASA and Comair to get rid of their RJ debt, use that money to stay alive in Chap 11, get rid of the pensions which would get rid of those huge payments due in the next 4 years, and restructure even more and hope to find some exit financing (which would be easier without all of those extra things attached--pensions, debt, etc). Do you have to go into Chap 11 to terminate the pensions? I don't know, but that is the most pressing item right now, besides the debt payments. Thanks Leo.



Bye Bye--General Lee

 

[bafanguy]

To raise cash, it's considering selling assets such as one or both of its wholly owned regional carriers, Cincinnati-based Comair and Atlanta-based Atlantic Southeast.


In a research note in late April, Calyon Securities airline analyst Ray Neidl estimated Delta is burning through $4 million in cash a day.

Six,

I was a meeting of Delta retirees on May 2nd where GG spoke and the two issues above were addressed.

One audience member got up and asked GG a pointed question about selling ASA/CMR. GG said he couldn't answer that directly but then went into a statement about DL's relationship with Skywest as an example of how one can still keep the necessary connection with a feeder airline via a contract relationship without actual ownership. He then laughed a bit and said something akin to, "...read my body language and facial expressions...". I was left with the distinct impression tht ASA/CMR will be gone when a buyer is arranged.

As for cash burn, he flatly denied that DL is burning $4M/day as reported by the press. He also refused to say how much DL is actually burning.

What's gonna happen to DL ? Who knows; certainly no one on this forum. But it sure doesn't give ME any warm/fuzzies.

 

[doh]

You don't need ch 11 to get rid of the pensions. You can bargain them away any time. To dump them on the pbgc may be another matter.

 

[FDJ2]

I wonder what GG is referring to when he says "structural changes" - could this refer to jettisoning DCI (spin off or sell off but maintain operational/feed benefits)?

I have no doubt that ASA/CMR are up for sale in one form or another, but that would only be a short term cash infusion of $600M-$800M to keep DAL's liquidity levels above $1.5B by years end. Delta will still use ASA/CMR small jet lift and it will in all liklihhod increase the number of CRJ70s in both fleets(E170s will probably go to Chq for the time being). However, by structural changes I believe GG is referring to the way DAL does business and utilizes its resources in general. DAL has increased the utilization of its existing mainline fleet, increaed pilot productivity by approximately 25% and reduced overall labor costs significantly. Operation clockwork and Simplifares are two other major structural changes that are ongoing. Total savings over time from these changes should be $3B/year by 2006 and $5B over the long haul. The problem DAL has is that these cost savings measures bring in a return over time, but the cost of fuel is immediate and so is the liquidity crunch.

GG recognizes that there is not more to be gained by going after labor. That's why he's basically said he doesn't plan on more pay cuts for employees. However, I do expect a sale of ASA/CMR to bring in much needed liquidity as well as a squeeze play on some of the DAL stake holders for additional financing and restructuring. Another important factor for DAL'S restructuring is pension reform. Spreading out $3B in payments over 25 years vs. 3 years. With DAL pensions either frozen (pilots) or scheduled for termination and converted to DC plans for active non contract employees by 2010, DAL will have minimal pension obligations over the long term if it can make it through 2010.

Quite a few things need to come together for GG's plan to work. Only time will tell if it does.

 

[FDJ2]

Do you have to go into Chap 11 to terminate the pensions?

Bye Bye--General Lee

The short answer is yes you do, that's why pension reform is one of the keys to avoiding CH11. There are other things that can be done, such as freezing benefits (done that) and converting DB to DC plans for active employees (done that), so DAL has essentially done most of what it can outside of BK.

 

[LoveGun]

I think Delta will sell ASA and Comair only as a last resort. Think about how much more money those two airlines would be worth in a healthy economy. How much money did Continental make when they spun off CoEx? Continental did that in peak market conditions. Delta will only get a fraction of the tru value of ASA and Comair if they sell them right now.

 

[FDJ2]

I think Delta will sell ASA and Comair only as a last resort. ...Delta will only get a fraction of the tru value of ASA and Comair if they sell them right now.

I agree with both of your points, but it's time to recognize that we are at that last resort decision time. Delta will never get back what it paid for ASA/CMR or invested in those two companies. That's just a fact. Delta will also get less for ASA/CMR under these circumstances then if the company and industry were healthy, but waiting until then may not be an option.

 

[ATR-DRIVR]

Why did Delta make the agreement with Mesa then?

 

[LoveGun]

Why did Delta make the agreement with Mesa then?

I think Delta can see desperation at Mesa. There is a good chance Mesa will be dropped at U and maybe AWA. Delta will then be able to ask JO for equity investment and the worst contract ever. I don't think US Air ever even asked Mesa for exit financing money. I could be totally wrong, but I think Mesa is on the way out at U. U is just being polite and letting it look like JO made the decision.

 

[On Your Six]

I have no doubt that ASA/CMR are up for sale in one form or another, but that would only be a short term cash infusion of $600M-$800M to keep DAL's liquidity levels above $1.5B by years end. Delta will still use ASA/CMR small jet lift and it will in all liklihhod increase the number of CRJ70s in both fleets(E170s will probably go to Chq for the time being). However, by structural changes I believe GG is referring to the way DAL does business and utilizes its resources in general. DAL has increased the utilization of its existing mainline fleet, increaed pilot productivity by approximately 25% and reduced overall labor costs significantly. Operation clockwork and Simplifares are two other major structural changes that are ongoing. Total savings over time from these changes should be $3B/year by 2006 and $5B over the long haul. The problem DAL has is that these cost savings measures bring in a return over time, but the cost of fuel is immediate and so is the liquidity crunch.

GG recognizes that there is not more to be gained by going after labor. That's why he's basically said he doesn't plan on more pay cuts for employees. However, I do expect a sale of ASA/CMR to bring in much needed liquidity as well as a squeeze play on some of the DAL stake holders for additional financing and restructuring. Another important factor for DAL'S restructuring is pension reform. Spreading out $3B in payments over 25 years vs. 3 years. With DAL pensions either frozen (pilots) or scheduled for termination and converted to DC plans for active non contract employees by 2010, DAL will have minimal pension obligations over the long term if it can make it through 2010.

Quite a few things need to come together for GG's plan to work. Only time will tell if it does.

Great response. Dude, you're way too smart to be an airline pilot.... Have you ever considered management? Just kidding.

 

[fam62c]

What are ASA and Comair worth?

I'm not sure that ASA and Comair are worth that much. Delta has destroyed the value of these companies by farming out work to Mesa and Chautauqua (who took DAL's money and is going to give it to USAirways). Continental Express was pretty much the exclusive provider for CAL and that gave them value. ASA and Comair are totally dependent on DAL for business and Delta keeps threatening Bankruptcy over and over. Why would anyone invest in ASA/Comair through a purchase or IPO and run the risk of Delta mainline failing and destroying all the value of the smaller airlines? I also wouldn't invest in ASA/Comair unless the business was freed from scope restrictions and had growth potential. The only way that the feeders are going to get the 70 to 100+ seat business will be to smash DALPA in Ch.11. If Dal wanted ASA and Comair to be worth something they should have merged them and let them be the exclusive providers of DAL feed. Whatever cash DAL could get for these airlines they would burn up anyway in short order and then have to use cash for cost+ agreements to get the feed from someone else.

 

[On Your Six]

I'm not sure that ASA and Comair are worth that much. Delta has destroyed the value of these companies by farming out work to Mesa and Chautauqua (who took DAL's money and is going to give it to USAirways). Continental Express was pretty much the exclusive provider for CAL and that gave them value. ASA and Comair are totally dependent on DAL for business and Delta keeps threatening Bankruptcy over and over. Why would anyone invest in ASA/Comair through a purchase or IPO and run the risk of Delta mainline failing and destroying all the value of the smaller airlines? I also wouldn't invest in ASA/Comair unless the business was freed from scope restrictions and had growth potential. The only way that the feeders are going to get the 70 to 100+ seat business will be to smash DALPA in Ch.11. If Dal wanted ASA and Comair to be worth something they should have merged them and let them be the exclusive providers of DAL feed. Whatever cash DAL could get for these airlines they would burn up anyway in short order and then have to use cash for cost+ agreements to get the feed from someone else.

Wrong. The value of a business can be determined by looking at the net present value of future cash flows. Any potential buyer (or the public in a spinoff) would look at a set contract over a certain time horizon (say an 8 year contract with a certain percentage of the flying at a certain rate per flight that is adjustable based on xyz factors). If you can guarantee a certain amount of the flying, you can determine a value based on those projected cash flows. Look at the CAL-COEX deal as an example. CAL cashed out and yet it retained the same operational/feed benefits (COEX was guaranteed a certain amount of the future flying).

It is true that Delta's future is a bit hazy at the moment (but most airlines will be in the same boat if fuel prices continue at this level). I would bet that Skywest is seriously considering ASA/Comair at the moment because now that Mesa is involved in addition to CHQ/SA, Skywest could potentially lose more Delta flying in the future unless it "plays ball" - it's a classic leverage play.... Plus, there's a lot of fleet commonality between Skywest and ASA (excluding the ATRs) and Comair so integration would be easier...

 

[ATR-DRIVR]

Plus, there's a lot of fleet commonality between Skywest and ASA (excluding the ATRs) and Comair so integration would be easier...[/QUOTE]

THAT would be the ONLY easy part as far as integration goes.

 

[Palerider957]

Wrong. The value of a business can be determined by looking at the net present value of future cash flows. Any potential buyer (or the public in a spinoff) would look at a set contract over a certain time horizon (say an 8 year contract with a certain percentage of the flying at a certain rate per flight that is adjustable based on xyz factors). If you can guarantee a certain amount of the flying, you can determine a value based on those projected cash flows. Look at the CAL-COEX deal as an example. CAL cashed out and yet it retained the same operational/feed benefits (COEX was guaranteed a certain amount of the future flying).

It is true that Delta's future is a bit hazy at the moment (but most airlines will be in the same boat if fuel prices continue at this level). I would bet that Skywest is seriously considering ASA/Comair at the moment because now that Mesa is involved in addition to CHQ/SA, Skywest could potentially lose more Delta flying in the future unless it "plays ball" - it's a classic leverage play.... Plus, there's a lot of fleet commonality between Skywest and ASA (excluding the ATRs) and Comair so integration would be easier...

What?? How can you predict "net present/future cash flow?? This is jibberish--NO ONE can predict the future of this industry, or DAL, or a spun off ASA/CMR. You would be asking an investor to commit hundreds of millions in acquisition cost, and BILLIONS of operating costs over a set period. Look at United, those bastar.ds are SUING people to keep them providing service at a greatly discounted rate --"we're in bankruptcy you know, so we deserve a price break, I don't care what your costs (or our contract) are." This will terrify investors, and make them force highly favorable terms from DAL. Does DAL have a choice?

You want us off of the Delta plantation, fine. Selling us (assuming you can find a buyer) will only increase our costs to you, while netting a small sum that DAL will piss away in short order. Investors would insist upon protections even in the event of a DAL bankruptcy, probably some large sum put in escrow (this would have to be many hundreds of millions). There are so many other GOOD investments out there today (not airline), that this would have to be a sweet deal.........and you could forget scope.

If we were bought by a well-managed company (that is, one that actually still has some CREDIT) we could greatly reduce costs by hedging fuel, that would be an immediate and substantial savings.

I'm all for a fire sale. Let us be bought by someone who knows how to run a business.

I think the writing is on the wall. DAL will severely contract, doing only trans-con and international flying. Everything else will be farmed out to "partners."

 

[Palerider957]

....but what do I know, I'm just a pesky RJ driver.

 

[On Your Six]

What?? How can you predict "net present/future cash flow?? This is jibberish--NO ONE can predict the future of this industry, or DAL, or a spun off ASA/CMR. You would be asking an investor to commit hundreds of millions in acquisition cost, and BILLIONS of operating costs over a set period. Look at United, those bastar.ds are SUING people to keep them providing service at a greatly discounted rate --"we're in bankruptcy you know, so we deserve a price break, I don't care what your costs (or our contract) are." This will terrify investors, and make them force highly favorable terms from DAL. Does DAL have a choice?

You want us off of the Delta plantation, fine. Selling us (assuming you can find a buyer) will only increase our costs to you, while netting a small sum that DAL will piss away in short order. Investors would insist upon protections even in the event of a DAL bankruptcy, probably some large sum put in escrow (this would have to be many hundreds of millions). There are so many other GOOD investments out there today (not airline), that this would have to be a sweet deal.........and you could forget scope.

If we were bought by a well-managed company (that is, one that actually still has some CREDIT) we could greatly reduce costs by hedging fuel, that would be an immediate and substantial savings.

I'm all for a fire sale. Let us be bought by someone who knows how to run a business.

I think the writing is on the wall. DAL will severely contract, doing only trans-con and international flying. Everything else will be farmed out to "partners."

Jibberish? Then how do you predict the value of any business for any merger or a stock offering? Net present value of future cash flows is the valuation standard - consult any finance text. You do not determine value on liquidation or fire-sale prices alone - that is one way to validate the valuation pricing structure. You can, however, project future revenue and costs based on historical analysis and trend analysis. True, everything is changing, but you can build change into the financial models. Both parties, the seller and the buyer, then agree upon the correct model and the correct variables. This analysis happens everyday - just ask your neighborhood investment banker....

Like it or not, I'll bet that Skywest and its financial advisors (as well as other parties) have already developed complex financial models to factor in the possible values of ASA and Comair and the resulting boost to overall revenue, costs, etc (based on a guarantee). The wheels are in motion and Grinstein has indicated that structural changes are coming soon....

 

[PHXFLYR]

I think Delta can see desperation at Mesa. There is a good chance Mesa will be dropped at U and maybe AWA. Delta will then be able to ask JO for equity investment and the worst contract ever. I don't think US Air ever even asked Mesa for exit financing money. I could be totally wrong, but I think Mesa is on the way out at U. U is just being polite and letting it look like JO made the decision.

How do you figure Mesa is on the way out at USAir? They have 30 erj's and a handful of CRJ's operating there. That's a pretty big chunk of small jet capacity
that would have to be replaced. I think the current USAir pilot agreement allows for something like 495 RJ's to be introduced into the fleet. Seems to me that Mesa might add more over time rather than less.

PHXFLYR

 

[fam62c]

Wrong. The value of a business can be determined by looking at the net present value of future cash flows. Any potential buyer (or the public in a spinoff) would look at a set contract over a certain time horizon (say an 8 year contract with a certain percentage of the flying at a certain rate per flight that is adjustable based on xyz factors). If you can guarantee a certain amount of the flying, you can determine a value based on those projected cash flows. Look at the CAL-COEX deal as an example. CAL cashed out and yet it retained the same operational/feed benefits (COEX was guaranteed a certain amount of the future flying).

It is true that Delta's future is a bit hazy at the moment (but most airlines will be in the same boat if fuel prices continue at this level). I would bet that Skywest is seriously considering ASA/Comair at the moment because now that Mesa is involved in addition to CHQ/SA, Skywest could potentially lose more Delta flying in the future unless it "plays ball" - it's a classic leverage play.... Plus, there's a lot of fleet commonality between Skywest and ASA (excluding the ATRs) and Comair so integration would be easier...

What would the "value of the future cash flow" at ASA/Comair be if Delta liquidated? You may be right but this is one investor who would stay far away from a spun-off ASA/Comair with DAL melting down. What if Delta filed Chapter 11 after the spin off? Look what UAL did to it's regional partners. The deal would be risky at best and that would greatly diminish the value of the carriers. I don't know if regionals are safe investments anymore because the majors are playing too many games with them and using BK ( or the threat of BK) to beat them down.

 

[General Lee]

What would the "value of the future cash flow" at ASA/Comair be if Delta liquidated? You may be right but this is one investor who would stay far away from a spun-off ASA/Comair with DAL melting down. What if Delta filed Chapter 11 after the spin off? Look what UAL did to it's regional partners. The deal would be risky at best and that would greatly diminish the value of the carriers. I don't know if regionals are safe investments anymore because the majors are playing too many games with them and using BK ( or the threat of BK) to beat them down.

Right now we have some major problems at DL besides fuel costs, and they are debt and the upcoming pension payments that are due. Selling ASA/Comair would lower debt payments because we have plenty of RJ debt---the CVG Chief Pilot telling me around $8 billion worth. That is huge. That is all we have been buying since 9-11. Any deal would have some guarantees attached, and they might even be part of any deal with Skywest or whoever decides to buy. As far as DL being liquidated, that isn't certain, especially if DL can get it's pension problems resolved and get rid of some debt(ASA/Comair)---the deal would look much more attractive to potential investors. Who would they be? Probably everyone involved right now (GE, AMEX, CHQ, MESA,) plus numerous other investors looking for a turnaround opportunity. The USAir/AWA merger supposedly has "plenty" of investors lining up. DL has a good product and a good name, along with a good route structure----the only thing we lack is money to pay some huge bills. With that cleaned up, we probably would be a good investment. Look at Air Canada---they were days within total shutdown. They ditched the pensions and restructured. Now they just ordered $5 billion worth of 787s and 777s. How did they do that? That is what investment bankers are for....


Bye Bye--General Lee