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TERMINAL FINANCIAL CONDITION
By Mary Jane Credeur
Atlanta Business Chronicle
Updated: 8:00 p.m. ET June 27, 2004
Disney has warned its investors that it may have to write off a $119 million aircraft investment in Delta if the troubled carrier ends up in bankruptcy court.
The California-based entertainment giant is one of several major corporations that lease airplanes to Atlanta-based Delta (NYSE: DAL) and other carriers.
"Delta's management has made no bones about the fact that bankruptcy is just around the corner if they can't bring their costs down," said Bill Rochelle, a partner with New York law firm Fulbright & Jaworski LLP, who has worked with bankrupt companies for 30 years. "The airline can't just limp along -- it's going to fail. And they know they are in terminal financial condition."
Disney (NYSE: DIS) has already written off a $114 million leveraged aircraft lease it had with United Air Lines Inc., which has been in bankruptcy for a year and a half.
Plane financiers are just a few of the thousands of potential creditors and lenders with Delta contracts that would be up for renegotiation if a bankruptcy filing occurs.
Although Delta CEO Jerry Grinstein still insists the Atlanta-based carrier can reorganize without court oversight, he acknowledged recently that Delta's $20.6 billion debt and its shrinking cash reserves of $2.5 billion have put the airline in a "perilous situation."
"We no longer have a financial cushion to offset losses going forward," Grinstein said in a June 7 memo to employees. "What we are now experiencing is not just part of the traditional cycle of ups and downs in the airline business."
Delta continues to battle with low-cost carriers such as AirTran Airways and Internet booking engines such as Expedia Inc., which can often undercut its fares on lucrative business routes. Grinstein also has said he is considering a reconfiguration of Delta's complex hub-and-spoke system as part of his top-to-bottom strategic review of the company that will wrap up by August.
Pilot pay crucial
Despite recent cost-cutting efforts that have trimmed $700 million from its overhead, Delta still has one of the highest unit costs in the industry at 10.7 cents per available seat mile (AirTran's is among the lowest at 8.3 cents; US Airways Group Inc.'s is highest at 11.5 cents).
After a year of deadlocking over the issue, the pilots union in mid-June notified Delta management that they intend to draw up a new proposal for wage concessions, possibly within a month. ALPA and Delta are scheduled to begin normal contract talks in August regardless of whether a concession agreement is reached.
Bankruptcy attorney David Dykhouse, a partner with New York firm Patterson Belknap Webb & Tyler LLP who once worked on Continental Airlines Inc.'s bankruptcy, predicted Delta may be in for a "Titanic battle" with its pilots to get concessions before a Chapter 11 filing.
"There will be a multifront war with the pilots until everybody feels like they've gotten what they need," Dykhouse said. "Right now, it's a big game of chicken. The unions might think [management] is bluffing or chest-thumping, but it seems pretty clear that they're not. It's a dire situation."
ALPA has repeatedly said it would not make pay concessions until Delta management made other fundamental changes in its business and sought cuts with other vendors and creditors.
Emory University professor Ralph Brubaker, who specializes in bankruptcy law, noted Delta probably doesn't want to have to negotiate with its pilots under a bankruptcy judge's oversight.
Many industry watchers as well as Delta's Grinstein have said the carrier may need to change its business model to effectively compete with low-cost carriers. Brubaker noted Delta could begin making some of those changes under the protection of bankruptcy, which would make it easier for the carrier to alter contracts or expand and retract parts of its business that need adjusting.
"They could make some radical changes in bankruptcy and emerge a much stronger company," Brubaker said.
What's on the table
If Delta files Chapter 11, it would likely continue its daily operations as usual while negotiating with major bank lenders, unsecured creditors, plane financiers, vendors and landlords to alter contracts or other obligations, bankruptcy experts say.
Once a company files for bankruptcy, all of its contracts get frozen and could be susceptible to renegotiation under court oversight.
An airline such as Delta would probably be most concerned with renegotiating leveraged airplane leases, long-term leases at airports, airport gate and terminal contracts, fuel contracts, hangar contracts, labor contracts and a variety of vendor or supplier contracts for things like food and beverages, said local attorney Dan Kolber, a partner with Gambrell & Stolz LLP.
"Bankruptcy is a shield where everything gets frozen and nothing can get done without a judge's approval," said Kolber, who was an executive with the now-defunct airline Air Atlanta. "Bankruptcy is not always logical and it's not at all predictable, and literally just about everything is on the table [for negotiation]."
Before a bankruptcy filing is made, Delta would likely try to get some concessions or better terms on its own with a handful of top lenders and creditors, Kolber said.
When Air Atlanta went bankrupt in 1978, management negotiated with plane financing companies and went a full year without paying a penny on the leases for nine of its planes, Kolber said.
"It was a better option for the finance company to let us keep flying the planes and try to survive, instead of taking the planes and guaranteeing that we would fail," Kolber said. Air Atlanta later liquidated after a lengthy labor dispute with its pilots.
Airport leases also would be on the table if Delta filed Chapter 11.
Delta's largest airport obligation is at its main hub at Hartsfield-Jackson Atlanta International Airport, and it also has significant obligations at Cincinnati-Northern Kentucky International Airport, Salt Lake City International Airport, Dallas-Fort Worth International Airport, New York's John F. Kennedy International Airport and Orlando International Airport.
Delta would then have to go through its leases and contracts one by one and, with approval from a judge and a creditors committee, accept or reject each contract.
United has rejected 108 leases worth $27 million in annual savings so far in its bankruptcy. The airline still is trying to eliminate roughly 125 claims worth $1.1 billion in addition to reclassifying other priority and secured claims.
Delta's Grinstein in mid-June revealed that some of Delta's suppliers and contractors are now demanding up-front cash payments for their services, and Chief Financial Officer Mike Palumbo has said in published reports that Delta's lenders and aircraft financiers have been open to Delta's requests for help.
"Delta's probably going through a whole series of one-on-one settlement negotiations with as many people as they can as a last-ditch effort to avoid bankruptcy," Dykhouse said.
Bankruptcy attorney Rochelle noted the problem with these early negotiations is none of the vendors and creditors have a complete picture of the situation. "The suppliers and creditors are probably willing to take a hickey if it means Delta will survive, but nobody wants to give in until they see what everybody else is giving in," Rochelle said. "Delta's biggest mistake is that they didn't go into crisis mode six or nine months earlier and start thinking of these types of things."
By Mary Jane Credeur
Atlanta Business Chronicle
Updated: 8:00 p.m. ET June 27, 2004
Disney has warned its investors that it may have to write off a $119 million aircraft investment in Delta if the troubled carrier ends up in bankruptcy court.
The California-based entertainment giant is one of several major corporations that lease airplanes to Atlanta-based Delta (NYSE: DAL) and other carriers.
"Delta's management has made no bones about the fact that bankruptcy is just around the corner if they can't bring their costs down," said Bill Rochelle, a partner with New York law firm Fulbright & Jaworski LLP, who has worked with bankrupt companies for 30 years. "The airline can't just limp along -- it's going to fail. And they know they are in terminal financial condition."
Disney (NYSE: DIS) has already written off a $114 million leveraged aircraft lease it had with United Air Lines Inc., which has been in bankruptcy for a year and a half.
Plane financiers are just a few of the thousands of potential creditors and lenders with Delta contracts that would be up for renegotiation if a bankruptcy filing occurs.
Although Delta CEO Jerry Grinstein still insists the Atlanta-based carrier can reorganize without court oversight, he acknowledged recently that Delta's $20.6 billion debt and its shrinking cash reserves of $2.5 billion have put the airline in a "perilous situation."
"We no longer have a financial cushion to offset losses going forward," Grinstein said in a June 7 memo to employees. "What we are now experiencing is not just part of the traditional cycle of ups and downs in the airline business."
Delta continues to battle with low-cost carriers such as AirTran Airways and Internet booking engines such as Expedia Inc., which can often undercut its fares on lucrative business routes. Grinstein also has said he is considering a reconfiguration of Delta's complex hub-and-spoke system as part of his top-to-bottom strategic review of the company that will wrap up by August.
Pilot pay crucial
Despite recent cost-cutting efforts that have trimmed $700 million from its overhead, Delta still has one of the highest unit costs in the industry at 10.7 cents per available seat mile (AirTran's is among the lowest at 8.3 cents; US Airways Group Inc.'s is highest at 11.5 cents).
After a year of deadlocking over the issue, the pilots union in mid-June notified Delta management that they intend to draw up a new proposal for wage concessions, possibly within a month. ALPA and Delta are scheduled to begin normal contract talks in August regardless of whether a concession agreement is reached.
Bankruptcy attorney David Dykhouse, a partner with New York firm Patterson Belknap Webb & Tyler LLP who once worked on Continental Airlines Inc.'s bankruptcy, predicted Delta may be in for a "Titanic battle" with its pilots to get concessions before a Chapter 11 filing.
"There will be a multifront war with the pilots until everybody feels like they've gotten what they need," Dykhouse said. "Right now, it's a big game of chicken. The unions might think [management] is bluffing or chest-thumping, but it seems pretty clear that they're not. It's a dire situation."
ALPA has repeatedly said it would not make pay concessions until Delta management made other fundamental changes in its business and sought cuts with other vendors and creditors.
Emory University professor Ralph Brubaker, who specializes in bankruptcy law, noted Delta probably doesn't want to have to negotiate with its pilots under a bankruptcy judge's oversight.
Many industry watchers as well as Delta's Grinstein have said the carrier may need to change its business model to effectively compete with low-cost carriers. Brubaker noted Delta could begin making some of those changes under the protection of bankruptcy, which would make it easier for the carrier to alter contracts or expand and retract parts of its business that need adjusting.
"They could make some radical changes in bankruptcy and emerge a much stronger company," Brubaker said.
What's on the table
If Delta files Chapter 11, it would likely continue its daily operations as usual while negotiating with major bank lenders, unsecured creditors, plane financiers, vendors and landlords to alter contracts or other obligations, bankruptcy experts say.
Once a company files for bankruptcy, all of its contracts get frozen and could be susceptible to renegotiation under court oversight.
An airline such as Delta would probably be most concerned with renegotiating leveraged airplane leases, long-term leases at airports, airport gate and terminal contracts, fuel contracts, hangar contracts, labor contracts and a variety of vendor or supplier contracts for things like food and beverages, said local attorney Dan Kolber, a partner with Gambrell & Stolz LLP.
"Bankruptcy is a shield where everything gets frozen and nothing can get done without a judge's approval," said Kolber, who was an executive with the now-defunct airline Air Atlanta. "Bankruptcy is not always logical and it's not at all predictable, and literally just about everything is on the table [for negotiation]."
Before a bankruptcy filing is made, Delta would likely try to get some concessions or better terms on its own with a handful of top lenders and creditors, Kolber said.
When Air Atlanta went bankrupt in 1978, management negotiated with plane financing companies and went a full year without paying a penny on the leases for nine of its planes, Kolber said.
"It was a better option for the finance company to let us keep flying the planes and try to survive, instead of taking the planes and guaranteeing that we would fail," Kolber said. Air Atlanta later liquidated after a lengthy labor dispute with its pilots.
Airport leases also would be on the table if Delta filed Chapter 11.
Delta's largest airport obligation is at its main hub at Hartsfield-Jackson Atlanta International Airport, and it also has significant obligations at Cincinnati-Northern Kentucky International Airport, Salt Lake City International Airport, Dallas-Fort Worth International Airport, New York's John F. Kennedy International Airport and Orlando International Airport.
Delta would then have to go through its leases and contracts one by one and, with approval from a judge and a creditors committee, accept or reject each contract.
United has rejected 108 leases worth $27 million in annual savings so far in its bankruptcy. The airline still is trying to eliminate roughly 125 claims worth $1.1 billion in addition to reclassifying other priority and secured claims.
Delta's Grinstein in mid-June revealed that some of Delta's suppliers and contractors are now demanding up-front cash payments for their services, and Chief Financial Officer Mike Palumbo has said in published reports that Delta's lenders and aircraft financiers have been open to Delta's requests for help.
"Delta's probably going through a whole series of one-on-one settlement negotiations with as many people as they can as a last-ditch effort to avoid bankruptcy," Dykhouse said.
Bankruptcy attorney Rochelle noted the problem with these early negotiations is none of the vendors and creditors have a complete picture of the situation. "The suppliers and creditors are probably willing to take a hickey if it means Delta will survive, but nobody wants to give in until they see what everybody else is giving in," Rochelle said. "Delta's biggest mistake is that they didn't go into crisis mode six or nine months earlier and start thinking of these types of things."
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