Delta to use cash to outlast competitors

[120% Torque]

US Airways' Siegel says Delta to use cash to outlast competitors
Dateline: Tuesday February 25, 2003

US Airways Group CEO David Siegel told employees that he believes that Delta Air Lines has broken ranks with the rest of the industry over the issue of government aid because it intends to use its superior balance sheet and liquidity to outlast network rivals.

In a recorded message, Siegel said that with the exception of Delta, the industry is "fairly unified" in terms of what it intends to ask of the government in the face of an impending war with Iraq that is impacting revenues severely. He continued, "I believe Delta is taking a different approach here, not trying to address their core problems through restructuring but rather play a waiting game with a superior liquidity position in hopes that we fail and that solves their problems."
The rest of the industry, however, is prepared to tell the government it is in "crisis," Siegel said. "We cannot afford to take on any new unfunded security mandates or antiterrorism insurance requirements."

Airlines will continue to press Secretary of Transportation Norman Mineta to maintain war risk insurance coverage, he added. And the industry is continuing to examine all fees and taxes collected and paid for by airlines and passengers to determine what relief might be available as it faces a liquidity crunch "like it has never seen before."

Additionally, the industry hopes Secretary of Energy Spencer Abraham will draw upon the Strategic Petroleum Reserve, according to Siegel, to help avoid interruption of the jet fuel supply and mitigate fuel prices. US airlines also want the Transportation Security Administration to perform all passenger and property screening and pay all associated costs, he said.

 

[General Lee]

Hey, has RJCAP, Surplus1, Fins, or anyone else read this last post? We should all take paycuts and help Leo outlast everyone.
Right!

Bye Bye---General Lee

 

[rjcap]

Hey, has RJCAP, Surplus1, Fins, or anyone else read this last post? We should all take paycuts and help Leo outlast everyone.

Gen Lee,

I understand the strategy here is to survive while the industry restructures but there is no room in my "minimal" compensation package for cuts.

From what I read it looks like USair may not make it out of chap 11 by March 31. They will lose their ability to process credit card transactions and no other processor will touch them while they are operating under chap 11.

 

[Daedalus]

Liquidity??

Well that's not the term I'd use to describe Delta's possible strategy. Even though this airline is the best positioned financially of the big five majors, their balance sheet is hardly something to boast over. Since the end of 2000 Delta has been unable to support its operations through its own internal operating cash flows, it's had to borrow heavily to keep its airplanes flying. The resulting mountain of debt has strangled shareholder equity and is a big reason why the airline's stock is dropping big time.

I agree with Seigel that Delta appears to be waiting out the others, but they must do it by borrowing BILLIONS of dollars every year (Over $3 billion in 2001). They can't keep doing this forever. They have a negative working capital base and a debt to equity ratio of over 7 to 1. These are not the indications of an airline that has a strong liquidity position.

Even worse is if UAL and US are able to come out of bankruptcy and have a substantial cost advantage over Delta's mainline operations. Delta would then find themselves being squeezed at both ends from the post-bankrupt majors and the LCCs. It'll be a big gamble gone bust if it doesn't turn out like Delta expects it will.

Here's a small fact to remember. There has never been an airline in the history of this industry that has successfully come back to profitability with the amount of losses that Delta has experienced. Now I'm not predicting Delta will fail, but I say this to point out how serious the situation is for even this airline.

 

[General Lee]

Daedulus,

Well I guess you and our CFO Michele Burns are not talking, right? Maybe you didn't hear her speak at a conference last week saying that we had a operational PROFIT of $177 million last quarter, and the losses sustained were mainly from one time charges consisting of parking the 727's, MD-11's, funding of Song, and buying 700 kiosks? She estimates that we will have the same liquidity ($2.6 billion in cash---some borrowed--) at the end of this year. She commented on how well our hedging program is working, and that we still have $5 billion we could mortgage. IF we are in trouble---then everyone else is already dead. We only have one union, and we are talking about cuts. I don't know where you get your information---but you need to look at the website of the "analysts' favorite" which is Delta.


Bye Bye---General Lee

 

[canyonblue]

Re: Liquidity??

and is a big reason why the airline's stock is dropping big time.

Only one Major Airline stock is trading above "junk status".

 

[SWA/FO]

Major Airline

SWA is within the big 5, right?

 

[Daedalus]

General Lee-

No I didn't talk to Ms. Burns, but that's okay since I don't need to. Rather than drink the company kool-aid she was offering the so-called analysts, I just went to the public SEC filings and looked at Delta's statement of cash flows. I agree with you that TECHNICALLY Delta has $2.6 billion in liquidity, but it comes at a terribly high cost to the airline. Unlike SWA, which generates its cash through internal means, Delta must issue tremendous amounts of new debt to keep its operations going. For example, in 2000, Delta borrowed less than $300 million dollars, but in 2001 it had to borrow over $3 billion dollars, of which $2.3 billion went to supporting its operations. The jury is still out for 2002, but I'm betting that the numbers will be very similar to 2001. With Delta's total debt almost $21 billion, they can't keep going like this forever. As a final point, your debt/equity ratio is now over 7.3 to 1, up from 5.2 to 1 the year prior.

I'm not trying to slam your company, but the strategy of waiting out the competition could prove to be very, very expensive. BTW, did you notice that two more major airlines (AA, NWA) have jumped onto the band wagon of asking their pilots to take significant, permanent pay cuts? With Delta pilots having the highest wages in the industry, it doesn't take a rocket scientist to see what's coming for your group.

 

[General Lee]

Daedalus,

First of all, they can't take anything away from us, even Leo admitted that they would have to ask through negotiations, which would not be one sided.

Here is a Leo Mullin quote at one of those "Lunch Conferences" at one of the Investment Banks on Feb 5th, 2003.(Three weeks ago)

"Delta has already accomplished the two most important requirements for survival: ensuring adequate liquidity and reducing cash burn to near zero."

"By the end of 2002, positive cash flow from operations totaled $381 Million, and despite a very tough environment, only $124 million in cash was required to fund daily operational and non-fleet capital purchases in 2002."

Go ahead, disagree with Leo, he doesn't know what he's talking about---He's only the CEO. No, you're right---we're goin down the crapper....Time for me to bail out!!!! Sheesh.

I know this is a very tough time for everyone, and I am sure we are going to give some pay back. But, don't tell me we're sinking like UAL and AA, because we are in a different situation. Now I don't think that our Sh!T don't stink, but I have a little more faith in our ideas and airline as a whole. But don't get me wrong, I will give to "save" this company--but it will all have snapbacks. Somebody has to hold up the bar----and we want it all back in better times.

Bye Bye---General Lee

 

[Daedalus]

The unaudited numbers you quote from Leo cannot be independently verified by SEC filings. Delta convienently forgot to leave out its statement of cash flows for its 2002 financials in the press release from last month.

I'm sure Leo is a very capable person and wouldn't lie about Delta's numbers, but when I look at latest public financial data, ending on 9/30/02, Delta must of had one helluva a 4Q in 2002 since the airline had an operating loss of $909 million, and with some financial engineering, they were able to show a $78 million operating CF gain.

Regardless, for the year ending through Sept 02 Delta had an operating loss of almost $1 billion dollars ($947 million to be exact). Net working capital was in the red by a tune of $4.9 billion dollars, and shareholder equity had dropped from $3.7 bn in 2001 to $2.8 bn by Sept 02. In the Delta PR which highlighted the 2002 numbers, it stated shareholder equity at $893 million. That's a drop of almost $2 billion dollars in the fourth quarter alone. Let's hope for your sake that was a typo. However, looking at your recent stock price its doubtful.

Look bottomline Delta is not generating sufficient revenue from its operations to pay its bills. Through Sep 02 the airline had operating revenues of $13.9 billion, and operating expenses of $15.5 billion. The negative working capital is evidence of that fact. The only way to keep the engine running is through the issuance of debt. In the last two years Delta has taken out almost $4 billion dollars in new debt. I'm not saying that your airline is following the steps of UAL, but I wouldn't be bragging about how strong this airline is either. Its dug a pretty deep hole for itself. I will be utterly amazed if you guys turn this ship around without taking a serious hit to your pay rates and work rules.

If you want to get a good comparison go look at SWA numbers and you'll see what I'm talking about. Yes, you have a contract that's good till 2005, but don't let that keep you from doing something you'll regret later. The current has become very strong in the area of "amending" labor contracts. Unfortunately you guys will have to swim against it and so far nobody has made it upstream to the headwaters yet, even with the paddles in hand. Good luck

 

[Full of LUV]

Wow

Wow, I thought I would never see the day where fellow pilots are COMPLAINING that some other pilots are overpaid. This is a dangerous slide our profession has embarked on. Delta pilots need to voluntary cut to SWA rates, where does it stop? What happens if SWA ever hits a snag, should they look to Aeromexico's 737 rates for a cut. I mean a decade from now we could all be counted as the "seriously overpaid" american airline pilots. All it takes is a little cabotage.

 

[spinup]

General Lee,

Let me get this right. You say that though UAL and AAA are bankrupt, AA and NWA in negotiations, that DAL is head and shoulders above the rest? You have got to be kidding me. Delta is only the turd with the fewest peanuts.

I have seen the term sheet offered by NWA management, it's horrendous. Similar to the one proposed at post BK UAL. If you haven’t seen it yet, sit tight, you will.

Lets not get into a pi$$ing match over whose company has a stronger balance sheet. Wake up and realize that your CBA, along with everyone else’s, is under attack. If we all don't pull together where forked.

When this turmoil is upon your doorstep it is already too late. The DAL pilot group is situated to loose a lot; you guys just don't realize it yet.

Instead of telling us how great Delta is comparatively, show the industry your support and help find a way through this. AAA ALPA is fighting for pension; UAL ALPA is fighting for one seniority list. These are huge issues that directly affect you! If either of these are lost look out, you will truly have your UAL +1.

The same guy you quote (Mullin) is watering at the mouth over what he will be able to do to your CBA. I hope you have a large supply of KY.

I am not advocating trouble at DAL and this is not about whom can stay out of bankruptcy, it’s about preserving the profession. Make no mistakes; we are all collectively under attack.

 

[46Driver]

UAL is fighting for one seniority list???? With who???

 

[spinup]

UAL MEC has publicly stated its opposition to “double breasting” mainline with LCC. Unfortunately, Mesa and Mesaba are fighting similar issues.

 

[46Driver]

Thanks for the clarification.

 

[General Lee]

Spinup,

I am not saying that Delta's demise could never happen or that our Sh!t don't stink, but Delta is not in the same position as UAL or AA. We actually had an operating PROFIT last quarter, and the losses came from one time charges---in other words those charges will never be seen again. When UAL and AA were losing big bucks at the beginning of this quarter (UAL losing $10 mil a day and AA losing $5-7 mill a day) Delta was losing $340,000 a day. Even with a war, which will hurt everyone I am sure, Delta will still capitalize on it's strengths---the Spring Breakers. Delta flies the most people to Florida, period. Even with war looming, Delta will fill planes and probably break even--which is better than losses. Our CRAF commitment is huge, with our 767ER's being used for med-evac and the MD-11's and 777's used for troop charters. Michael Boyd (Yeah, I know he gets paid by the airlines....etc) thinks Song has a good chance of doing well, even with the dumb name. Atleast we have a plan against the LCC's, and it is already in place and going forward. We have more RJ's than anyone else, which means flexibility. We have $5 billion worth of mortgagable assets and borrowing power----according to our CFO Michele Burns. We are probably going to give back some pay---and we only have one union. We hedge better than anyone except Southwest---over 65% of our fuel is pre-bought at 77-75 cents, and UAL is paying a $1.25 per gallon. We have given a stock dividend each quarter---even through 9-11, which proves that Leo loves the stock holders. This all may sound like a dumb commercial or like I am bragging, but I am trying to say that Delta is NOT in the same position as the other two. Things might get worse and the Moon might explode, but right now we are doing OK. Let's hope this war is over quick and the economy gets better sooner than later. Sure, Delta might get hurt by the War etc... but other airlines will be dead in the water, and then Delta will expand again. Thanks for your concern.

Bye Bye---General Lee

 

[Ty Webb]

I agree with the General here . . . in fact, DAL would be making money right now, if they didn't insist on losing their shirt to keep a few stragglers off our airplanes.

Funny thing is, people used to think that the LCC's set the prices low, but from what I'm seeing right now, DAL, in their attempt to win marketshare during the downtime, is keeping the prices lower by dumping seats a a loss in our markets.

In other words, they could probably at least break even right now, if they stopped charging our prices down to the last seat, but they are willing to lose money to keep people off of our airplanes. Funny thing is, we are still making money at these prices . . . we could go on like this forever. SOemday, DAL will come out of their cave, rubbing their eyes and scratching their collective behinds, and realize that if they stopped fighting us tooth and nail for the bottom customers, they'd probably be making money . . . . and maybe someone will shake Leo's hand, and welcome him to the Millenium . . . . . . .

 

[spinup]

I guess you missed this one. Note that Leo's comments assume no BK at AA. Stop hitting the snooze alarm and wake up.




02/26 00:11
Delta's Mullin Comments on United Bankruptcy, Labor Costs
By Lynne Marek

Chicago, Feb. 25 (Bloomberg) -- Delta Air Lines Inc. Chief Executive Officer and Chairman Leo Mullin comments on the bankruptcy proceedings at UAL Corp.'s United Airlines, the need to reduce industry labor costs and other issues. The comments came in a speech to the Economic Club of Chicago and in questions following the speech.

On United's situation:

``United has got the greatest network of any airline company in the world, it's a company whose brand is recognized worldwide and, in my judgment, it simply has to succeed in some light,'' he said. United has a situation where ``its costs are substantially out of control.''

``You wouldn't be able to turn United around without tackling (the costs) in a very aggressive way.''

On industry costs and possible reductions resulting from the effects of bankruptcy proceedings at United and US Airways:

``The adjustments that (airlines) are making are in some senses, unfortunately, overdue to make this a much more cost- effective industry. Whether or not that can be carried out in such a way where the pain of that can be made appropriately low remains to be seen.''

``If United and US Airways ``are succeeding in getting themselves reorganized under bankruptcy they will come out with a cost structure that is substantially better than that of the solvent carriers, and this would put a tremendous amount of pressure on organizations like Delta, American (Airlines), Northwest (Airlines Corp.) and Continental (Airlines Inc.) to revamp their cost structures outside of bankruptcy. I think in some sense that's a bit of a fair fight.''

If United is successful in reaching its pilot cost reduction goals it ``could be 30 percent better off in terms of pilot costs than Delta. Now, there's no way that Delta can go forward and be successful in the long term with that kind of variance in pilot cost. So we have some heavy lifting to do to deal with over time.''

On the impact of a war in Iraq:

``War will have a tremendous impact on the airline industry and with a very weak industry such as we have right now, it could have very serious repercussions for everybody.''

 

[Full of LUV]

Uh Huh!

Yeah, Delta ought to just roll over and let Airtran take over. An airline seat is a time valued commodity, I fail to see how matching Airtran's rates down to an empty seat will produce less revenue than flying empty seats. Why doesn't Airtran just raise it's rediculously low fares, give their employees a raise and then ya'll could move into peachtree city and enjoy the good life! You see that if DAL paid it's people 40% less, they could probably show a profit on the ever crucial $39 each way from ATL to DAY. I wonder if Leo is listening to Airtran for suggestions on how to correct the revenue problems dogging the industry?

 

[Heavy Set]

Someday...

Some day the economy will rebound (yeah, it may take awhile...), and Delta will cash in on all of the business travelers who will be sick of Airtran and Southwest. Yields will improve again and Delta will have the proper mix of LCC and regular mainline flying to appeal to the all-important business traveler. Sure, it will NEVER be the same as it was in the latter 90s, but business travelers will be back, and they will want more legroom and frequent-flyer points than you will find on a corndog 737...

It may take 2-3 years, but Delta will likely weather the storm, create a competitive LCC with 60 757s (a lot of capacity) and will capture the lion-share of eventual business travelers who will no longer have UAL (maybe liquidated) and AA (busted with zero plan) to choose. Delta will be the YIELD KING in a few years...

Don't count out Delta just yet... Mullin is paid too well to roll-over and die...