More Delta Trouble

[Mach92]

MIAMI - Delta Air Lines' year-end 2004 financial statements paint a picture of a company for whom the bell tolls. The balance sheet shows a company with $21.8 billion in assets and $27.6 billion in debts. Put another way, it has a negative net worth of $5.8 billion, which means that in bankruptcy, shareholders and a lot of creditor claims will be wiped out. Since the company says it has insufficient cash to survive the year, a bankruptcy filing this year would seem inevitable.

What is different here from the other distressed airlines is that Delta Air Lines (nyse: DAL - news - people ) talked this doom and gloom last year in order to get its unions to go along with wage cuts and other downsizing moves. That battle was won, so further union concessions are unlikely. The fact that Delta is still on this negative forecast probably means that it has run out of rocks to squeeze.

It is clear that the airline industry needs a structural solution, and that solution is mergers to reduce competition and drive up prices. Peter Drucker, the famous management professor, noted that all industries have to deal with up to three significant vulnerabilities. They are either capital intensive (vulnerable to interest rates, declining credit ratings), labor intensive (vulnerable to unionization, wage inflation and strikes) or highly dependent on the price of a raw material (in Delta's case, fuel). What makes airlines so vulnerable is that they are one of the few industries that have all three vulnerabilities. While Delta can deal with its workforce and arm-twist its creditors, it now faces ruinous fuel prices over which it has no leverage.

As for market perceptions of the Delta situation, one can only wonder. The common stock is currently trading at $4.20, although it is technically worthless. The company has three trust preferred issues that are actually bonds. Lehman Brothers (nyse: LEH - news - people ) issued the Delta Air Lines 9% Corporate Backed Trust Certificates (nyse: CDC - news - people ) and another Delta Air Lines 9% issue (nyse: CYA - news - people ), trading at $8.30 and $8.20, respectively. Meanwhile, a third issue, Delta Air Lines 8.125% Senior Notes (nyse: DNT - news - people ), which was created by Delta, is trading at $7.90. The DNT issue just paid a quarterly dividend, while the other two pay every six months.

Should Delta file bankruptcy, the CDC and CYA issues are lower-rated junior debt and would immediately be called for whatever the underlying bonds can be sold for. This is true for all third-party trust preferreds. If a company files for bankruptcy, the trustee is forced to liquidate the underlying bonds within 30 days. The period immediately after a company files bankruptcy is usually a low point in the price of its debt issues, hardly the point you want to be sold out.

The DNT issue represents senior notes, however, and would remain in place, since it was issued by Delta. Hence, logic dictates that the DNT issue should sell at a premium to the other two. This is true for comparable bonds selling at $39, or equivalent to a preferred price of $9.75, not $7.90. But then, we're talking about the market, silly me!

 

[snow-back]

Pretty cheery news! I've got to wonder if this house of cards we call an airline industry is soon about to topple over.

 

[General Lee]

Again, this is all before DL sells part of DCI. And think about it, who thought USAir would still be around by now? Nobody. If USAir can stick it out, I believe DL can. There are still options DL can do, like selling DCI, pay cuts for the non-union employees (no negotiating necessary), etc. This is becoming old news. The fuel issues has been talked about before. We just added fuel surcharges, and Grinstein can't really jump up and down about them sticking because we are still lobbying Congress for pension help. All doom and gloom for the near term I am sure.



Bye Bye--General Lee

 

[MedFlyer]

Again, this is all before DL sells part of DCI. And think about it, who thought USAir would still be around by now? Nobody. If USAir can stick it out, I believe DL can. There are still options DL can do, like selling DCI, pay cuts for the non-union employees (no negotiating necessary), etc. This is becoming old news. The fuel issues has been talked about before. We just added fuel surcharges, and Grinstein can't really jump up and down about them sticking because we are still lobbying Congress for pension help. All doom and gloom for the near term I am sure.

Bye Bye--General Lee

But at the rate DL is burning cash, selling part of DCI would only buy DL a few months. The difference between DL and USAir is that USAir had assets they could leverage which has kept them alive. DL has virtually no assets left, save for the DCI carriers whose value is rapidly declining.

If DL intends to survive in this high-fuel cost environment, DL's is going to have to do a lot more than sell DCI.

 

[USCtrojan]

Yikes

Negative net worth of 5.8 Billion. Am I understanding that correctly? Holy SH!T. Sell ASA and Comair you're lucky to get a half billion, assuming you can find a buyer.

Trojan

 

[anon]

So - the question now is -

Will the DL pilots take an additional 30% paycut and loss of pension to survive?

Will the DL non-union groups do the same?

I think it's safe to say that if you're less than 50 yrs old, don't count on a DL pension for retirement.

 

[General Lee]

But at the rate DL is burning cash, selling part of DCI would only buy DL a few months. The difference between DL and USAir is that USAir had assets they could leverage which has kept them alive. DL has virtually no assets left, save for the DCI carriers whose value is rapidly declining.

If DL intends to survive in this high-fuel cost environment, DL's is going to have to do a lot more than sell DCI.

What is the burn rate per day after the fuel surcharges came into effect? I don't know, do you? No assets after that? How about that new $400 million BOS terminal we just paid for? How about JFK? How about those untapped non-union people that can be GIVEN pay cuts with no say----that is most of our employees? We don't have any room huh? We are on our way to cutting $5 billion A YEAR in savings, and we need the "room" to get there. We also will probably get pension savings from Congress---which could amount to hundreds of millions of dollars a year in savings---just around the corner or the PBGC will be slammed again. It is just a matter of time, and selling DCI will give us that time.


Anon,

What are you talking about? Another 30% to survive? What? I can't see it getting that high, no way. I can see the non-union people losing another 10-15%, and then heavy maintenance will be wiped away in favor of outsourcing (what everyone else is doing), and other major changes. If Congress doesn't help with the pensions, I think they will go away too, which is fine with me since I have 20 years to go. (age 60 retirement) I think most people can see that too. Also, if those pensions are a target, I can see many more pilots leaving.


USctrojan,

At the right price, you can always find a buyer. ASA and Comair are worth something, and their associated debt leaving our books is worth something too.


Bye Bye--General Lee (off to NY tonight)


In the mean time, DL's honchos have to do whatever it takes to survive, including adding more debt and trying to get us through to better times:

Delta files for $500 mln mixed shelf offering
Mon Mar 28, 2005 05:48 PM ET
WASHINGTON, March 28 (Reuters) - Delta Air Lines Inc. (DAL.N: Quote, Profile, Research) filed on Monday to periodically sell up to $500 million in common and preferred stock, debt securities, warrants and other securities.


In a registration statement with the U.S. Securities and Exchange Commission, Delta said it will use proceeds from the offering for general corporate purposes.

 

[IAHERJ]

Look, I work for the competition in ATL and I will tell you that DL isn't going anywhere. Delta is GA's largest employer and the state, along with the city of ATL will invest in Delta to keep them alive if not for anything more than the tax revenue Delta provides to the area. Then you have CVG, Northern Kentucky, the state of Utah etc. and you get the picture. If Delta files, so will NWA and CAL just to prove a point. You think UA has been in CH 11 for a while? That's nothing compared to Delta's potential stay in the court system should they file.

That's my opinion. I've been wrong more than right.

IAHERJ

 

[PurpleMember]

Is anyone else in this forum tired of the everyone constantly coming to Big D's defense? I know you are all proud Delta Family members, but give it a rest. Delta has been no different than the rest when it comes to mismanagement and big employee payoffs. Delta is just afraid to wear the scarlet letter of 'B' for Bankruptcy.

The city of Atlanta owning an airline? Hell, they can't keep their own Mayor from dipping his hand in the till at the airport, and he's under a Federal Indictment to boot. All we need now is more involvement at Hartsfield-Jackson-Young-Turner Airport. Did I leave anyone out of the 'new' airport name, if so my apologies.

 

[General Lee]

Is anyone else in this forum tired of the everyone constantly coming to Big D's defense? I know you are all proud Delta Family members, but give it a rest. Delta has been no different than the rest when it comes to mismanagement and big employee payoffs. Delta is just afraid to wear the scarlet letter of 'B' for Bankruptcy.

The city of Atlanta owning an airline? Hell, they can't keep their own Mayor from dipping his hand in the till at the airport, and he's under a Federal Indictment to boot. All we need now is more involvement at Hartsfield-Jackson-Young-Turner Airport. Did I leave anyone out of the 'new' airport name, if so my apologies.

I think I am the only one really coming to DL's defense. (maybe FDJ2 also) That is ok. We have people working on this problem, and it is a LARGE problem. To say that they are dealing with something tough is an understatement. The current management is largely different than previous management, in the sense that all of the others left with their bonuses. The current people have stock options, but that means to do well we must all do well. There are large obstacles in our way, but they are doing what they can. We have some options available, but not many. Even Chap 11 is an option, and Grinstein seems to want to avoid that.

I don't see the city of ATL doing much, but they will be behind us in every way that they can. That is just the way it is.


Bye Bye--General Lee