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Delta - Fuel Costs May Trigger Bankruptcy

Tue Nov 16, 2004 8:45 pm reports that according to Delta's quarterly SEC filing the company may still have to seek bankruptcy protection if fuel costs remain at there current level.

We project that our annual fuel expense will be approximately $950 million higher in 2004 than it was in 2003. Approximately 86% of this increase is due to higher fuel prices. These projections assume an average fuel price per gallon in 2004 of $1.15 (net of hedging gains), which is 40% higher than our average fuel price per gallon in 2003, and aircraft fuel consumption of approximately 2.5 billion gallons, which is 7% higher than the aircraft fuel gallons we used in 2003

According to the article and Delta's 10-Q, Delta has secured $1bn in financing from Amex and General Electric and will defer a further $175m of debt which will become due in 2005. It will further require up to $150m in financing and find $85m in liquidity the first quarter of 2006.

Even if we are successful in achieving all of the approximately $5 billion (compared to 2002) in targeted annual benefits...we will still have substantial liquidity needs. Although we have received the Financing Commitments, [(referring to the Amex and General Electric financing)] the closing and funding of these transactions are subject to significant conditions, many of which we cannot control.

...[I]f we are unable to obtain additional necessary financing or deferrals to meet our liquidity needs, or if our liquidity needs are higher than we currently estimate, we would need to seek to restructure under Chapter 11 of the Bankruptcy Code.

Our liquidity needs will be substantially higher than we expect if:

• Oil prices do not decline significantly. Our business plan assumes that oil prices decline to an average price per barrel of $40 in 2005 and $35 in 2006. The forward curve currently implies substantially higher prices during such periods. If oil prices were to stay at current levels of approximately $50 per barrel, we estimate that our liquidity needs would increase by an additional $600 million in 2005 and an additional $900 million in 2006. We have no hedges or contractual arrangements that would reduce our costs below market prices.

• Any of the other assumptions underlying our business plan prove to be incorrect. Many of these assumptions, such as yields, competition, pension funding obligations and our access to financing, are not within our control.

• We are unsuccessful in achieving any of the approximately $5 billion of targeted benefits (compared to 2002) of our transformation plan. Many of the benefits of our transformation plan, such as incremental revenues, are not within our control.

• Our Visa/MasterCard processor requires a significant holdback. Our current Visa/MasterCard processing contract expires in August 2005. If our renewal or replacement contract requires a significant holdback, it will increase our liquidity needs.

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