Delta Air Lines files for bankruptcy
No. 3 airline hit by fuel costs, low-fare competitors; No. 4 Northwest follows it into bankruptcy.
September 15, 2005: 9:55 AM EDT
By Chris Isidore, CNN/Money senior writer
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Delta's Chapter 11 filing
NEW YORK (CNN/Money) - Delta Air Lines filed for bankruptcy, making it one of two major carriers to seek protection from creditors Wednesday.
Delta (
Research), the nation's third-biggest airline, has been hurt by the recent spike in jet fuel prices and growing competition from lower-cost, low-fare carriers. Less than half an hour after Delta's filing, Northwest Airlines also filed for
protection from creditors.
Delta and Northwest followed
United Airlines (
Research) and
US Airways (
Research) into bankruptcy. United, the No. 2 airline, has been in bankruptcy court for almost three years. US Airways has been in bankruptcy court twice since the Sept. 11 terrorist attacks that shook the airline industry.
With those four major airlines and some smaller ones already in bankruptcy, nearly half of the industry's capacity is on carriers operating under bankruptcy court oversight.
Delta said it expects to keep flying while it seeks to cut costs and reorganize, so the immediate
impact on flyers should be minimal. It is also expected to keep its frequent flyer program intact. But some smaller cities now served exclusively or primarily by Delta could be hurt as the airline trims its operations going forward.
The Atlanta-based airline, which has not had a profitable quarter since 2000, filed under Chapter 11 of federal bankruptcy laws. In Chapter 11, a company is protected from creditors while it tries to reorganize.
Analysts said this year's spike in jet fuel prices forced Delta's bankruptcy filing.
"Hurricane Katrina was probably the last straw," Ray Neidl, analyst with Calyon Securities, said shortly before the widely expected bankruptcy filing. "Nobody could have predicted $60-, $70-a-barrel oil. Things just developed that were uncontrollable factors."
But Delta's problems predate not only the hurricane, but the Sept. 11, 2001 terrorist attacks. The company has lost some $6.1 billion since the start of 2001 from its airline operations, according to First Call, which tracks corporate earnings.
Some analysts said that Delta waited longer than some of its rivals to trim costs. It did not win cost concessions from its pilots union until last October, after paying them the highest wages in the industry under a contract reached months before the Sept. 11 attacks.
"They are another example of a company that started out in a relatively stronger financial position than their peers, and they felt they were in better position to survive a shakeout," said Philip Baggaley, Standard & Poor's senior airline credit analyst. "They didn't pursue cost-cutting as aggressively as they would have if they were heading toward bankruptcy early in the (industry's) downturn."
The airline has nearly 60,000 employees and flies about 340,000 people daily in its mainline operations, which includes Delta, the Delta Shuttle and Song, its attempt to compete in the growing low-fare market.
Another problem for Delta is that it has less international traffic than the nation's other big carriers. That means it faces competition on more routes from low-fare carriers such as AirTran, JetBlue and Southwest than some of its rivals.
Scramble to cut costsDelta had been scrambling through the strong summer travel season to cut costs and raise cash.
Last week it completed the sale one of its feeder airlines, Atlantic Southeast Airlines, for $425 million. It also announced it was cutting flight capacity at its Cincinnati hub by 26 percent.
But these and other cost-cutting moves made over the last year could not stem losses, which are forecast by analysts to extend into 2007. The company has not reported a quarterly profit, excluding special items, since 2000.
Delta flirted with a bankruptcy filing in October 2004, before getting the Air Line Pilots Association to agree to cut wages by about a third – a move that saved about $1 billion a year. The airline also cut some 5,000 jobs in the year ending in June, aside from the sale of Atlantic Southeast.
Its second quarter payroll costs were 18 percent below a year earlier, as the company spent nearly $300 million less on salary and benefits.
But soaring fuel costs caused ongoing losses. Delta's cost per gallon soared 50 percent in the second quarter from a year earlier, and has kept climbing.
The increased costs came as Delta and other carriers found it difficult to win higher fares from passengers, who have more options with the growth of low-fare rivals.
The average fare Delta received from passengers fell 1 percent in the second quarter from a year earlier, even as the proportion of empty seats on Delta jets fell.
The final cash crisis came when the bank that was processing the airline's Visa and MasterCard ticket purchases started holding back money as protection in case of a bankruptcy filing. The airline warned in August that such a move by the bank could cost $650 million by the end of October, straining its already thin cash reserves.
