This was in Sundays ATL paper:
Delta Air Lines is starting to carry some heavy baggage — growing talk that a bankruptcy filing may be in its future.
Chief Executive Gerald Grinstein tells workers he will "fight like hell" to avoid the "B-word," as he called it at a recent meeting with pilots. But at the same time he bluntly says the Atlanta airline must bring down pilot wages and other costs or it cannot survive.
Airline industry analysts have issued a flurry of reports handicapping Delta's Chapter 11 odds. Its stock has plunged to lows not seen since last year, when American Airlines rattled the industry by nearly landing in Chapter 11 over similar labor cost issues.
No one is predicting a Chapter 11 filing in the next few months. But, barring signs of a turnaround, the issue could come to a boil by early 2005, analysts believe.
They say a wide range of indicators, including ongoing losses, depressed stock and bond prices, lowered debt ratings and other factors point to a higher risk that Delta will default on its bonds. That event often coincides with a Chapter 11 reorganization.
"They can continue for a while," said Philip Baggaley, an analyst with Standard & Poor's, which recently downgraded Delta's debt to "B-," deep into junk bond territory. He said Delta can probably muddle along for another year or two, growing increasingly vulnerable to competitors or unexpected events.
A Chapter 11 decision point could come sooner if Grinstein and Delta's board come to believe a court filing — or the threat of one — is the only way to achieve cost-cutting goals.
In a Chapter 11 case, the basic aim of which is to keep a company intact while it renegotiates debts, the company typically can achieve deep wage and benefit cuts. Both United and US Airways, the two major carriers that have filed since 9/11, did so under court supervision, and American used the threat of a filing to negotiate steep cuts.
In the meantime, here are some key indicators that experts say can indicate if, and when, Delta may seek reorganization in bankruptcy court:
The financial community has many ways of making its concerns known about a company's deteriorating bottom line.
Moody's, another credit rating agency, downgraded much of Delta's debt in February to "B3" and pegged its unsecured bonds at an even lower "Caa2." About one in four companies with the latter rating misses debt payments, files bankruptcy or otherwise defaults within a year, according to the agency.
Lower credit ratings make it harder and more expensive for Delta to borrow money and do business. Delta now has to prepay part of its fuel bills, for instance, which was part of the reason it had to tie up an extra $120 million in cash last year on prepaid expenses.
Some insurers and other parties require Delta to put up more collateral because of its lower credit rating, the airline disclosed last month in a filing with the Securities and Exchange Commission.
Since late January, the market value has dropped more than 20 percent on many of Delta's unsecured bonds that mature more than a few years out. That's a sign of weakening confidence in the airline's long-term health.
Delta's stock is down more than 30 percent this year, dipping below $8 a share.
Most other airlines' securities have also declined amid heightened concerns over high jet fuel prices and recent terrorist attacks, but not as much.
"This is about the lowest you've ever seen Delta. It should tell you people are concerned, but it's not down to bankruptcy levels," said Ray Neidl, an airline stock analyst with Blaylock & Partners in New York.
American's stock dropped below $2 a share when it was on the verge of filing Chapter 11 last spring, he said.
Delta is in "somewhat difficult straits," said Edward Altman, a finance professor at New York University's Stern School of Business. In the late 1960s he developed a "Z-score" bankruptcy prediction model, which takes into account a company's market value and other factors.
Based on that model, Delta "is certainly within the distress zone," said Altman. Still, he said before Delta gets close to a filing, suppliers may complain of slow payments or Delta may miss some interest payments or try to renegotiate some debt covenants.
"I think they've got a ways to go," he said.
Cash on hand
The most important numbers to watch, experts say, are Delta's cash reserves and how fast it's using up cash — the "burn rate." Delta discloses cash reserves quarterly but leaves it to analysts to estimate a burn rate.
Delta finished last year with $2.7 billion in unrestricted cash despite a $773 million loss for the year, partly because it also borrowed $2.2 billion. Delta recently said it expects to finish the first quarter with $2 billion in unrestricted cash, after losing about $400 million and using $325 million to shore up its employee pension plans.
But Delta also has tapped most sources from which it can borrow more money to shore up reserves. Most of its aircraft are already borrowed against, and it has no more credit lines to draw on.
Delta also faces some hefty obligations this year, including about $1 billion in debt coming due, and large pension and interest payments. In an SEC filing, Delta said it expects to have sufficient cash flow from its operations to cover those obligations.
"Currently, liquidity is very good," said Moody's analyst Richard Bittenbender.
The airline is also headed into the summer travel season, its busiest of the year. That means an extra short-term boost to Delta's cash, said Bittenbender, as travelers pay upfront for vacation tickets, effectively making millions of small loans to the airline.
S&P's Baggaley expects Delta to continue reporting the airline industry's biggest losses this year, further eroding its cash reserves. But he said Delta also has extra flexibility compared with other airlines because of its mostly nonunion work force. The industry's improving traffic levels are also helping.
On the other hand, Neidl thinks Delta's cash reserves could dip to dangerous levels by next spring.
"I give them 12 months," said Neidl. He expects Delta to use about $1 billion of its cash this year. He said Delta will hit a "liquidity crisis" when its cash reserves fall to $1 billion, but it will not want to wait that long to enter Chapter 11.
Pilot pay talks
Other industry watchers agree it's unlikely Delta will slowly bleed to the point it's forced into bankruptcy.
The more likely scenario, they say, is that Delta's management eventually could conclude it's making no progress in wage-cut talks with its pilots union, and that it's better to use Chapter 11 to cut costs while it still has adequate cash reserves to keep operating. The airline could ask a bankrupcty judge to throw out its pilot labor contract or other supplier agreements to get costs more in line with competitors'.
"There's no line in the sand," said Bittenbender. The determining factor will be Delta management's "best judgment that ... it's time to reorganize with the help of a judge."
Delta's talks with its pilots, the highest-paid in the industry, have been on and off again since last summer. The company initially asked for a phased-in 30 percent pay cut and other concessions that would reduce total pilot costs by around 40 percent. The union has offered to take a 9 percent pay cut and to skip a 4.5 percent raise that takes effect May 1.
A Delta captain of a narrow-body jet typically makes about $225,000. Standard & Poor's says Delta pilots' pay is about 60 percent higher than restructured contracts at other big carriers.
Grinstein has been meeting with pilots in Atlanta and Delta's other hubs to present his case that Delta needs lower costs to compete with discount airlines whose growth erodes pricing power.
Karen Miller, spokeswoman for the Air Line Pilots Association, said no new talks have been scheduled since the union shifted its focus from concession talks to getting ready for regular contract negotiations. The contract becomes amendable in May 2005.
"Our position hasn't changed. We're still willing to negotiate with the company," she said. "Management's going to have to be willing to engage in these discussions with something other than demanding their opening position."
Baggaley said Delta's chances are better to win the deeper concessions it wants in regular contract talks. The problem, he added, is it will take much longer, and Delta's finances are deteriorating.
Some analysts think the most likely bankruptcy scenario involves an unexpected event — such as another terrorist attack or a spike in already-high fuel prices. A weakened Delta would have little financial room to maneuver.
The average price of crude oil, the main ingredient in jet fuel, so far this year has been about $35 a barrel — about $7 higher than airlines were expecting.
Meanwhile, the airlines' weak finances make it harder for them to negotiate "hedging" contracts that can offset fuel price boosts.
With the exception of Southwest and a few other discount carriers, most big airlines no longer have any fuel hedge contracts in place, meaning they now pay spot-market prices.
In Delta's case, the airline began the year with about one-third of its 2.5 billion-gallon annual fuel consumption hedged at 76 cents a gallon.
But in February, it sold its hedging contracts ahead of schedule for $83 million in cash. Jet fuel now costs about 94 cents a gallon.
Delta spokesman John Kennedy said Delta made a "strategic decision" to sell all its hedging contracts based on several factors, including long-term projections that fuel prices would go down.
However, in a recent SEC filing, Delta said "our credit ratings have negatively impacted our ability to ... obtain certain financial instruments that we use in our fuel hedging program."
Fuel is typically an airline's second-highest expense after labor. Delta says each $1 hike in crude oil prices increases its annual fuel bill by about $60 million.
"If fuel prices stay this high, that's going to accelerate [Delta's cash] outflows," said Baggaley.
Sounds like this year isn't going to be fun as an employee.