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USAToday article on Delta

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General Lee

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Joined
Aug 24, 2002
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Delta expects to soar after exiting Chapter 11Wall Street is generally bullish on Delta, which is expected to emerge from bankruptcy at the end of the month.
Before
After exit




Total jet fleet size
527​


446​
Total employees
53,000
47,000​



Total debt, excluding pension funds
$17 billion​



$7 billion



Total annual revenue
$16.2 billion​


$18.5 billion​



Revenue from flying 1 seat 1 mile
8.5 cents​



9.65 cents



Cost of flying 1 seat 1 mile(1)
8.3 cents​


7 cents​
Annual net loss/income
-$2.2 billion(2)
$500 million(3)​
1 = excluding fuel costs; 2 = excludes reorganization costs in 2005; 3 = 2007 projection
Sources: Delta Air Lines, Calyon Securities, Morgan Stanley

By Marilyn Adams, USA TODAY
As Delta Air Lines exits Chapter 11 bankruptcy next week, it leaves behind 19 months of tumult, including a hostile takeover attempt, a major strike threat, stratospheric fuel prices and deep cuts in jobs and paychecks.
Yet, Delta, one of four big U.S. carriers forced into bankruptcy since the Sept. 11 terrorist attacks, has fared better than the others. After getting what is expected to be a judge's blessing on Wednesday, the No. 3 airline will emerge from bankruptcy on April 30 flying to more destinations in more countries than any other airline in the world.
It might also get to claim the airline industry's second-highest market value after Southwest Airlines (LUV) and the lowest debt burden of any traditional hub-and-spoke airline, analysts say. Atlanta-based Delta will have accomplished this in less time, with less acrimony and at less cost than any of its bankruptcy brethren: US Airways (LCC), United Airlines (UAUA) and Northwest Airlines.
Delta's relatively swift, successful turnaround is attributed to skillful lawyering, management focus and lessons learned from other airlines.

"It's amazing what a well-run bankruptcy will do," says veteran airline analyst Ray Neidl of Calyon Securities.Wall Street, in general, is bullish on the new Delta. Morgan Stanley analyst William Greene said in a report last week that Delta, which turned a small annual operating profit last year for the first time since 2000, "has the potential to be one of the more profitable airlines in the U.S."

Monday, the airline said its first-quarter net loss narrowed to $130 million as it shifted more service to higher-profit international routes. The loss a year earlier was $2 billion. Excluding claims from Delta's regional partners and other reorganization costs, the loss was $6 million. Sales rose 11% to $4.1 billion, and operating profit was $155 million.

Although airline stocks are notoriously volatile and Delta's future success isn't assured, Greene estimates the reorganized airline could have a stock market value of $11.4 billion based on its "vastly improved" margins and balance sheet. Delta's pre-bankruptcy shares will be worthless. "We've changed virtually every aspect of our company," says Delta CFO Edward Bastian, a candidate to replace CEO Gerald Grinstein, 74, who will retire soon.

Delta has come a long way from the dismal days of late summer 2005. That August, Hurricane Katrina wreaked so much damage on oil drilling and refining facilities that jet fuel prices soared off the charts. Delta's cash reserves sank to $200 million — enough, Bastian says, to meet only one payroll and cover a couple of weeks of jet fuel. A $2 billion bankruptcy loan kept the airline aloft.

Changing focus

Since then, Delta has steadily pulled away from its historic focus on the East Coast and Florida, where it took a drubbing for years from low-fare competitors such as Southwest Airlines, JetBlue (JBLU) and AirTran Airways (AAI). While Delta remains more of a domestic carrier than competitors such as United, its percentage of total revenue from international flights has grown to 35% from 20%. That was a strategic step that other traditional airlines have made: Discount airlines don't fly to Europe, Latin America or Asia, so fares to those places are more profitable.
Delta's total debt, excluding employee pension plans, has fallen to about $7 billion from $17 billion before the filing. Its unit cost, the cost to fly one plane seat one mile, is also down sharply. Morgan Stanley predicts Delta's operating profit margin could hit 10% in 2008, higher than that of American, Continental or United airlines.

Throughout the process, Bastian says, Delta's managers, who had vowed to get through Chapter 11 in 18 months, worked feverishly to keep things moving. Their advocate in court was New York bankruptcy lawyer Marshall Huebner, whom American Lawyer magazine just named one of its 2006 "dealmakers of the year."

Huebner, a partner at law firm Davis Polk & Wardwell, avoided much of the costly, time-consuming litigation that United lawyers faced by negotiating more out-of-court agreements with angry creditors that filed claims against the company. Although bankruptcy cases are usually marked by monthly court hearings on disputes to be argued before the judge, Huebner canceled 60% of them because the issues had been resolved. "Fundamentally, we're here to cut deals," Huebner says. "We took a proactive approach to listening to what people wanted."
Those deals didn't necessarily come cheap. Delta's settlement with retired pilots, who lost benefits when the company terminated its underfunded pilots pension plan, grants them about $550 million in new Delta stock when the airline exits bankruptcy.
The retirees' lawyer, Dean Booth of Atlanta, was so grateful, he sent Huebner's wife two dozen roses for putting up with her husband's long hours of negotiations.
In the end, Huebner says, Davis Polk & Wardwell expects to bill Delta about $40 million for its efforts the past 19 months, less than half the nearly $100 million Kirkland & Ellis charged United for its 38-month bankruptcy. Although United is a larger and more complex airline with multiple labor unions rather than Delta's one, the contrast in fees is striking.

Fleet, schedule alterations

One of the most profound changes for Delta was a major reorganization of its aircraft fleet and schedule. Delta retired dozens of aging Boeing 737s and 767s even as it expanded its route network. Last year, it opened 60 new international routes. Along with its regional airline partners, it now flies to 300 destinations in 52 countries.
Glen Hauenstein, Delta's chief network and revenue officer, recalls that when he joined the company shortly before the bankruptcy filing, Delta was losing buckets of money by flying wide-body 767s and 777s from Atlanta to Florida in a near-obsession to protect its Florida market share from rivals.
"We were flying a 767 on a 9 p.m. flight from Fort Myers to Atlanta that had eight people on it, on average," Hauenstein recalls. "We had a mismatch of fleet to markets. Those planes were capable of flying much different missions."

During Hauenstein's tenure, Delta rapidly reshuffled the fleet to put its largest planes on its longer routes and smaller planes or regional jets on shorter routes. Today, Delta flies 767s from Atlanta to Copenhagen, Denmark, and New York to Budapest, Hungary. It flies 777s to Mumbai, India, and Tel Aviv, Israel, and will use those jets to fly to Seoul when that service starts in June.
At the start of the bankruptcy, Delta also led the industry in the number of very early and very late departures. Many flights departed around 5 a.m. or after 9 p.m. Today, the bulk of flying starts later and ends earlier, creating efficiencies
.
Delta has doubled its operation at New York's John F. Kennedy Airport, to almost 200 departures a day. JFK not only serves New York, the world's biggest air market, but is a major gateway to Europe.
Next year, Delta will start receiving five new long-range 777s and 12 new 737s. Reorganizing the fleet, shortening the day and adding international routes has had a significant impact on the bottom line.
"We have increased revenue, with a smaller fleet, by billions of dollars a year," says Hauenstein.The close of Delta's Chapter 11 ordeal finds the company in an odd position in the cutthroat world of bankruptcy restructuring.
Most of its key interest groups — employees, retirees, creditors, investors — seem satisfied with the outcome.
"Right now," says Grinstein, "I would say it's a very happy time for the company." Gone for now is the acrimony with its pilots union, which a year ago this month was threatening to strike over Delta's proposal to void its contract and impose pay cuts. A strike could have triggered a liquidation. The two sides ultimately agreed to somewhat smaller pay cuts than the company demanded. Cont.....
 
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Today, union chief Capt. Lee Moak says pilots "are excited about working for a profitable airline. I see employees recharged."
Delta's other, non-union employees also have reason for optimism. Although they took significant cuts in pay and benefits, Delta management made sure that employees at all levels would receive a financial stake in the new company. Rank-and-file Delta employees will get a 3.5% share of the stock in the reorganized airline.
A 2.6% equity stake will go to 1,200 Delta top managers. That's a fraction of the 8% stake that top officers of United received after that airline exited bankruptcy in 2006 — a payout that still rankles United's unions.


Surprise gift
As a parting gift, Delta CEO Grinstein, who is leaving this summer, declined any stock, stock options or cash bonuses, post-bankruptcy. Instead, he asked Delta to spend what he would've gotten in bonuses on scholarships and emergency hardship assistance for employees.
His surprising gesture, almost unheard-of in the world of spiraling executive pay, was a hit with workers and creditors.
"It was great that he did that," Moak says.


Creditors seem satisfied, too. They stand to get more than 90% of Delta's new stock. The creditors' committee stood behind Grinstein and his team earlier this year when US Airways pressured the creditors to agree to a $10 billion hostile takeover offer that Grinstein and his team staunchly opposed. Creditors rejected the offer in favor of Delta's stand-alone plan.
In voting two weeks ago, 95% of creditors' ballots backed Delta's reorganization plan, a strong vote of confidence.
Now the company must keep the momentum going.
"Coming out, the company looks terrific," Grinstein says. "It has been a siege."


Bye Bye--General Lee
 

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