Hey General, Spin the upside

[Flying Freddie]

SAN FRANCISCO (CBS.MW) -- Delta Air Lines' new boss vowed Wednesday to tame how much it spends on pilots, saying the money-losing company needs to get more aggressive in competing with its rivals.


Downgraded Delta leads airlines lower

Gerald Grinstein's comments came in his first quarterly conference call as chief executive after Atlanta-based Delta (DAL: news, chart, profile) posted narrower fourth-quarter losses and higher revenue.

"We will not cripple our company over the long term to achieve a short-term deal," he said, citing the troubles of US Airways (UAIR: news, chart, profile) as a cautionary example. Talks with Delta's unionized pilots are ongoing so details were scarce about any progress.

"Delta must achieve a competitive cost structure," Grinstein added.

Delta shares closed up 1 cent to $12.15 on volume of more than 5.5 million shares -- the most active stock in the airline sector. See full story.

In his comments during the conference call, Grinstein said the right things, remarked Vaughn Cordle, an industry analyst who runs Airline Forecasts. "His No. 1 job is he represents shareholders," said Cordle. But the company's pilots are in a very powerful position, having outlasted Grinstein's predecessor Leo Mullin without coming to an agreement. "They will determine whether or not Delta can cover the cost of capital."

If the message was well received in the investment community, the pilots appeared to harden their position, according to a hotline update for Air Line Pilots Association members. "The union will consider management's comments made today during the analysts' webcast as well as the lack of progress in negotiations when evaluating our options," said Chris Renkel of the Master Executive Council Committee.

Though Delta's fourth-quarter results did improve from last year, Grinstein termed the losses "disappointing." Before the market opened, the airline reported a quarterly loss of $327 million, or $2.69 per share, narrower than its year-earlier loss of $367 million, or $2.98 per share.

Excluding one-time items, the company lost $207 million, or $1.71 per share, wider than the average estimate among analysts polled by Thomson First Call for a loss of $1.66 per share. In a survey by Reuters Research, the average forecast was $1.65. Some on Wall Street had expected a wider loss. See full story.

Delta reported a $134 million charge tied to its pilots' pension plan, a gain of $26 million for the sale of 11 737 jets, and a $21 million gain for sales of stakes in online travel sites Orbitz and Hotwire. It also recorded a $5 million gain related to hedging and derivatives.

Delta added that it achieved $14 million in lowered expenses related to a cost-cutting program originating in 2002.

Revenue rose 2.7 percent to $3.398 billion, up from $3.308 billion in the final three months of 2002.

In addition to controlling spending on pilots, Grinstein said another top priority will be reducing Delta's $20.8 billion debt load.

Delta's labor costs were 0.4 percent higher in the quarter at $1.552 billion, while fuel costs were 7.4 percent higher at $510 million. The company had $2.9 billion in cash at quarter's end and also said it expects to have a $450 million pension funding obligation in 2004.

In 2003, Delta lost $773 million, or $6.40 a share.

Standard & Poor's followed by downgrading Delta's debt rating to "B+" from "BB-" and said they could be downgraded again. Delta faces $1 billion in debt maturities this year and another loss this quarter of between $300 million and $350 million.

"The downgrade is based on Delta's continued heavy, albeit narrowing, losses, a relatively high operating cost structure, and substantial upcoming debt maturities and pension obligations," said S&P credit analyst Philip Baggaley.

 

[250scp]

DAL takes its turn under the spotlight

Delta's shortfall is a surprise
Airline reviews costs after red ink for quarter exceeds expectations


11:15 PM CST on Wednesday, January 14, 2004

By ERIC TORBENSON / The Dallas Morning News


Just three years ago, it was hard to believe that Delta Air Lines Inc. would be considered both a financial underachiever and a high-cost carrier.

But the Atlanta-based carrier faces both perceptions, after missing Wall Street's average earnings estimates for the fourth quarter and sporting costs topped only by faltering US Airways Corp.

Delta, which operates a major hub at Dallas/Fort Worth International Airport, reported Wednesday that it lost $327 million in the fourth quarter and $773 million for 2003. It lost $363 million in the fourth quarter of 2002 and $1.3 billion for that whole year.

Removing one-time charges related to pensions, Delta's loss of $207 million for the fourth quarter translated into $1.71 a share. Wall Street had expected a loss of $1.66 a share.

The latest numbers contrast with Delta's image before the September 2001 terrorist attacks, when the carrier's lack of labor unions gave it a cost advantage.

The results aren't acceptable to new chief executive Gerald Grinstein, who has launched a top-to-bottom review of the carrier's strategy that he hopes to finish by July.

"We must achieve a competitive cost structure," he said on a conference call with analysts Wednesday. "Increasing industry pressures require us to make absolutely certain that our strategy meets the test of being successful over the long term."

A big part of Delta's cost problem is that its pilots are the best paid of any airline by a wide margin. Talks continue between Delta and the pilots' union.

The airline wants them to take a 30 percent pay cut, and the union has countered with a proposed 9 percent cut. The carrier will be cautious about accepting a deal that cuts costs now, but drastically increases them later.

"We will not cripple our company for the long term in order to achieve a short-term deal," Mr. Grinstein said. Delta pilots earn as much as 50 percent more than counterparts at Fort Worth-based American Airlines Inc.

Bookings are down

Delta's more immediate concerns are bookings, which are down domestically compared to this time last year, said Michele Burns, chief financial officer. The airline will add 10 percent capacity this year compared with 2003, much of that coming from Delta resuming overseas flights it stopped when the war with Iraq began last March.

For the fourth quarter, Delta said, its revenue was up 2.7 percent over the same period in 2002, but its costs kept pace by rising 2.6 percent. Stubbornly high fuel prices inflated costs, though Delta has locked in lower prices for more than half its fuel needs for the current quarter.

Ms. Burns projected that Delta would lose $300 million to $350 million in the current quarter. Though that loss would be smaller than the $425 million lost in last year's first quarter, it had analysts concerned that Delta would be lagging its peers as the industry recovers.

Debt rating cut

With that in mind, Standard & Poor's cut the ratings Wednesday on Delta's long-term debt and certain securities that are backed by its aircraft.
During a question-and-answer session on the conference call, UBS Securities analyst Sam Buttrick said some of the airline's cost-cutting goals seem hard to achieve.

Specifically, Delta now pays about 10.5 cents per seat mile, a standard industry measure, and wants to get that down to about 8.5 cents.

"I'm still a little puzzled" at Delta's math, he said.

Despite results that were worse than expected, Delta shares rose a penny to $12.15.

Ray Neidl of Blaylock & Partners said Wall Street was more focused on evidence of an ongoing recovery than the fourth-quarter losses.

Also, many investors expect more upbeat reports from American and other carriers when they report earnings next week.

Mr. Grinstein said he was concerned about Delta's total debt, more than $20 billion, though the carrier has adequate unrestricted cash reserves of $2.7 billion.

With just two weeks on the job, Mr. Grinstein underscored just how difficult a task remains ahead of him. The airline's planes look old, he said, and its employees need re-energizing. Delta plans to refurbish its fleet.

The nation's No. 3 carrier is also focusing more attention on its new low-fare carrier, called Song. But the effort can be awkward for Delta, as it installs upgraded in-flight entertainment for every seat on its budget product, while asking customers to pay a premium for its less exciting coach offering.

Mr. Grinstein says he expects more competitors that look like JetBlue Airways Corp.

"People like to get into the airline business like they like to own sports teams," he said, predicting that Wall Street will back new airlines with low-cost, low-fare strategies.

Delta has talked with US Airways about acquiring some of the struggling carrier's assets, as have other airlines, he added.


Grinstein is going to be calling "game on" pretty quick to get the pilot's pay back in line with the rest of the industry. I don't think 9% is going to make the grade.

 

[TriStar_drvr]

Typical management response. When things are going poorly, it's the employees' (especially highly paid pilots) fault. When things are going well, all credit for success goes to the management team.

To the Delta pilots. Hang tough if you dare. Good luck.