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Gas Prices Fuel Delta Air Lines Second-Quarter Loss

Posted on: Saturday, 23 July 2005, 00:00 CDT

Jul. 22--Full planes and fare hikes helped Delta Air Lines cut its losses and preserve cash during the spring and early summer, but high fuel prices continue to undercut its effort to rebound.

Delta said Thursday it lost $382 million in the second quarter, adding to a four-year run of red ink that now totals $10 billion -- more than any airline that hasn't resorted to a stop in bankruptcy court.

The deficit was far smaller than the $1.96 billion net loss posted a year ago, although that consisted mainly of one-time write-offs.

Delta said restructuring efforts helped boost revenue nearly 6 percent and cut nonfuel costs an impressive 11.6 percent.

Still, the loss contrasted sharply with the modest profits posted a day earlier by rivals American and Continental airlines, which got an earlier start at cost control and have more profitable international routes. It leaves Delta the subject of speculation that a Chapter 11 bankruptcy filing may loom later this year, when travel demand drops and cash could dwindle.

"We continue to believe that an out-of-court restructuring is the better course," Delta Chief Executive Officer Gerald Grinstein told analysts. But he added, "There are some things beyond our control."

Chief among them is the price of jet fuel, which reached $1.60 a gallon in the second quarter, 53 percent higher than a year earlier.

Delta's total fuel bill topped $1 billion for the three-month period, consuming almost a quarter of its revenue.

Calyon Securities analyst Ray Neidl said Delta preserved cash and cut costs better than he expected. Excluding one-time charges, Delta said it lost $304 million, or $2.11 a share, slightly better than Wall Street estimates.

"They want to stay out of bankruptcy," Neidl said, but "they are facing the grim reaper of reality."

Delta's results and a management shake-up announced Wednesday prompted some analysts to query executives in a conference call Thursday about how they plan to avoid the need for a Chapter 11 filing, which would enable the company to suspend and renegotiate debt payments while staying aloft.

On Wednesday, Delta named a new chief operating officer and possible successor to Grinstein, who is 73 and expected to leave sometime next year. Delta also replaced its chief financial officer, Mike Palumbo, hiring back former Delta executive Ed Bastian.

Grinstein deflected questions about whether the shuffle indicated a Chapter 11 filing was more likely.

"I wouldn't read anything into Michael's departure on that score or Ed's arrival," Grinstein said.

JPMorgan analyst Jamie Baker asked what Delta planned to do to generate cash either to stay out of bankruptcy or to fund its reorganization in bankruptcy.

If Delta files for Chapter 11 protection, "something has to be left over in order to achieve some form of (reorganization) financing . . . or is the plan to simply burn all of the possible furniture that you have in order to remain out of the court process?" he asked.

"I'm afraid I can't get into all that," Grinstein replied.

Delta shares dropped 9 percent Thursday , to $3.55. Part of the reason could have been a Wall Street Journal story that, without naming any sources, asserted some board members and executives were telling Grinstein that the recovery effort may be futile and a Chapter 11 case inevitable.

In the analyst call, Delta executives said they planned to speed up network changes and efficiency moves by ditching 14 older jets, trimming growth plans this fall, and shifting more wide-body jets from domestic to international routes.

They're also looking for ways to strengthen the airline's finances, but didn't disclose details.

"Delta must step up the pace. ... We are re-examining everything we do," said Jim Whitehurst, the newly promoted chief operating officer. He previously oversaw route and pricing strategies and strategic planning.

Delta is believed to be in talks with a group of lenders led by General Electric to get more financial breathing room, and could be close to selling its regional carrier subsidiary, Atlantic Southeast Airlines, to raise cash.

Backing from GE and American Express, coupled with job and pay cuts, helped Delta avert a Chapter 11 case last fall. Delta went back to GE and American Express last quarter for more help, persuading them to modify loan restrictions in the previous bailout package.

Delta said second-quarter traffic rose 5 percent. Unit revenue -- the amount Delta takes in for each seat-mile flown -- increased only by about 1 percent despite a string of industry-wide fare increases to offset fuel inflation.

Baker said in a research note that he didn't hear enough to raise his hopes for an outside-court recovery.

"No news is bad news, in our opinion," he said. "We are disappointed that increased intelligence chatter surrounding a planned second lien deal with GE and/or ASA sale remains just that -- chatter."

In one hopeful note, Grinstein said it appeared more likely that Congress would give airlines more time to bring their pension plans up to fully funded status. In Delta's case, that will require $3 billion over the next three years, but the airline is lobbying for a 25-year payment period.

The chairman of the Senate Finance Committee, Charles Grassley (R-Iowa), is expected to introduce a bill today offering 15 years to make the payments, more than double the seven years in a House bill.

"The Senate bill has tremendous support behind it and we expect it to address our problem," Grinstein told analysts.

Also Thursday, discount carrier JetBlue posted a $12.2 million second-quarter profit, down sharply from a year ago, while America West Airlines said its profit climbed 30 percent to $13.9 million.

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DAL, GE, AXP, JBLU, AWA,

Source: The Atlanta Journal and Constitution

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