typhoonpilot
Daddy
- Joined
- Feb 24, 2002
- Posts
- 1,381
"Delta Goes to Bankruptcy Court"
A fictional tale, I hope, for your amusement. [This article appeared in the
last issue of the DFW Round Up, before we offered our latest concession
package.]
Judge: Ok, let's get these proceedings started. I understand you are the
attorney representing Delta Air Lines, and that Delta Air Lines is seeking
protection under the chapter 11 of the federal bankruptcy code. Is this
correct sir?
Delta's attorney: Yes your honor. Here are the required documents and
evidence.
JUDGE: As you are aware, in order to grant bankruptcy protection, the law
requires that your company must have done everything reasonable in its power
to prevent a declaration of bankruptcy. Furthermore, this court must be
presented with a viable business plan to ensure this situation does not
happen again. I must now review actions by Delta Air Lines leading up to
this situation. Please state your case.
DL: Your honor, for the past three years, Delta has suffered major financial
losses and a dramatic increase in debt. We are now in a position whereby we
cannot pay the debt service given our current revenue and costs. We feel,
the primary culprit of our financial situation is pilot salary costs and we
seek relief from the pilot contract.
JUDGE: That's it? Just the pilots?
DL: Uh, yes your honor.
JUDGE: Well looking at your quarterly financial reports for the past 7
years, it appears you have let your debt level to swell up to around 20
billion dollars, which causes roughly an annual debt service of a billion
dollars per year. So I'd like to see where all this debt came from. First, I
see that your company engaged in a 2.5 billion dollar stock buyback program.
How much is this worth now?
DL: Um, virtually nothing.
JUDGE: You also spent over 2.5 billion dollars purchasing Comair and ASA?
DL: Yes. Both these companies were subcontractors of ours previously. In the
case of ASA, there was quality control issues we felt could be better
managed if we owned them. As for Comair, by outsourcing to them so much
work, we allowed to become a monopoly in our Cincinnati hub. We were afraid
they could become a competitor, or be purchased by one of our competitors.
JUDGE: OK, I also see that your management then went on an aircraft spending
spree, buying hundreds of regional jets for your Comair and ASA Delta
Connection division at a cost of an additional few billion dollars. I hope
these planes are a wise investment. Are they are cheaper to operate?
DL: Well not exactly. These regional jets have a seat cost of around 16 to19
cents per seat mile whereas our existing mainline jets cost about 9.5cents.
JUDGE: So then I hope they attract more passengers. They are more
comfortable, right?
DL: No, they are smaller, offer no first class, no overhead storage, and you
have to be a contortionist to use the lavatory. But they sure beat flying a
turboprop. We believe we can we create greater demand due to higher
frequency when we replace mainline flying with these jets.
JUDGE: So you offer more of a product your customer doesn't truly prefer?
DL: Yes, but they are profitable.
JUDGE: Well how can that be when they cost almost twice as much to operate?
DL: Oh that's easy. Delta mainline subsidizes them by purchasing their
airplanes, paying for their facilities, providing marketing, as well as
reservations, distribution, etc. etc. Basically, we pay all their fixed
costs.
JUDGE: Well how would Delta mainline be doing if Delta Connection was
actually paying their own expenses?
DL: Well it doesn't matter, we are all one big company and all the money
goes into one big pot, so to speak.
JUDGE: Then how do you know if the regional jets are truly profitable?
DL: Um, I'll have to get back to you in about four to six weeks on that one.
JUDGE: And if all your money goes into one big pot, how is it you figure
that your mainline pilot costs are your problem?
DL: Look, we need to get our costs down and this is the easiest expense to
go after, OK!
JUDGE: That is your plan? I did mention you have to have a viable business
plan, right? How is your Song operation doing?
DL: Great! It is profitable, customers love it, and it has received great
reviews from the press.
JUDGE: Because you have gotten lower cost pilots at Song?
DL: Well your honor, that is not exactly correct. Song uses the same
mainline pilots at the same pay rates.
JUDGE: Bailiff, can you get me some aspirin? I am getting a headache.
Bailiff: Here you go sir.
JUDGE: All right, what about these charges of over a billion dollars for
terminal improvements in Boston and New York?
DL: Well, our old terminals looked "yucky."
JUDGE: "Yucky?" How about the 600 million you lost due to the Comair strike?
I hope it was worth it.
DL: Well, we settled at our last offer, so we didn't really save anything.
We figure the difference between what the Comair pilots wanted and what we
gave them will have been worth it in about 20 years.
continued in Part II
A fictional tale, I hope, for your amusement. [This article appeared in the
last issue of the DFW Round Up, before we offered our latest concession
package.]
Judge: Ok, let's get these proceedings started. I understand you are the
attorney representing Delta Air Lines, and that Delta Air Lines is seeking
protection under the chapter 11 of the federal bankruptcy code. Is this
correct sir?
Delta's attorney: Yes your honor. Here are the required documents and
evidence.
JUDGE: As you are aware, in order to grant bankruptcy protection, the law
requires that your company must have done everything reasonable in its power
to prevent a declaration of bankruptcy. Furthermore, this court must be
presented with a viable business plan to ensure this situation does not
happen again. I must now review actions by Delta Air Lines leading up to
this situation. Please state your case.
DL: Your honor, for the past three years, Delta has suffered major financial
losses and a dramatic increase in debt. We are now in a position whereby we
cannot pay the debt service given our current revenue and costs. We feel,
the primary culprit of our financial situation is pilot salary costs and we
seek relief from the pilot contract.
JUDGE: That's it? Just the pilots?
DL: Uh, yes your honor.
JUDGE: Well looking at your quarterly financial reports for the past 7
years, it appears you have let your debt level to swell up to around 20
billion dollars, which causes roughly an annual debt service of a billion
dollars per year. So I'd like to see where all this debt came from. First, I
see that your company engaged in a 2.5 billion dollar stock buyback program.
How much is this worth now?
DL: Um, virtually nothing.
JUDGE: You also spent over 2.5 billion dollars purchasing Comair and ASA?
DL: Yes. Both these companies were subcontractors of ours previously. In the
case of ASA, there was quality control issues we felt could be better
managed if we owned them. As for Comair, by outsourcing to them so much
work, we allowed to become a monopoly in our Cincinnati hub. We were afraid
they could become a competitor, or be purchased by one of our competitors.
JUDGE: OK, I also see that your management then went on an aircraft spending
spree, buying hundreds of regional jets for your Comair and ASA Delta
Connection division at a cost of an additional few billion dollars. I hope
these planes are a wise investment. Are they are cheaper to operate?
DL: Well not exactly. These regional jets have a seat cost of around 16 to19
cents per seat mile whereas our existing mainline jets cost about 9.5cents.
JUDGE: So then I hope they attract more passengers. They are more
comfortable, right?
DL: No, they are smaller, offer no first class, no overhead storage, and you
have to be a contortionist to use the lavatory. But they sure beat flying a
turboprop. We believe we can we create greater demand due to higher
frequency when we replace mainline flying with these jets.
JUDGE: So you offer more of a product your customer doesn't truly prefer?
DL: Yes, but they are profitable.
JUDGE: Well how can that be when they cost almost twice as much to operate?
DL: Oh that's easy. Delta mainline subsidizes them by purchasing their
airplanes, paying for their facilities, providing marketing, as well as
reservations, distribution, etc. etc. Basically, we pay all their fixed
costs.
JUDGE: Well how would Delta mainline be doing if Delta Connection was
actually paying their own expenses?
DL: Well it doesn't matter, we are all one big company and all the money
goes into one big pot, so to speak.
JUDGE: Then how do you know if the regional jets are truly profitable?
DL: Um, I'll have to get back to you in about four to six weeks on that one.
JUDGE: And if all your money goes into one big pot, how is it you figure
that your mainline pilot costs are your problem?
DL: Look, we need to get our costs down and this is the easiest expense to
go after, OK!
JUDGE: That is your plan? I did mention you have to have a viable business
plan, right? How is your Song operation doing?
DL: Great! It is profitable, customers love it, and it has received great
reviews from the press.
JUDGE: Because you have gotten lower cost pilots at Song?
DL: Well your honor, that is not exactly correct. Song uses the same
mainline pilots at the same pay rates.
JUDGE: Bailiff, can you get me some aspirin? I am getting a headache.
Bailiff: Here you go sir.
JUDGE: All right, what about these charges of over a billion dollars for
terminal improvements in Boston and New York?
DL: Well, our old terminals looked "yucky."
JUDGE: "Yucky?" How about the 600 million you lost due to the Comair strike?
I hope it was worth it.
DL: Well, we settled at our last offer, so we didn't really save anything.
We figure the difference between what the Comair pilots wanted and what we
gave them will have been worth it in about 20 years.
continued in Part II
