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Fuel Cost May Spell 'Broke' for Delta

Posted on: Thursday, 11 August 2005, 00:00 CDT

Aug. 10--Every time the price of oil increases by $1 a barrel, it costs Delta Air Lines $60 million a year, which means the company's fuel bill could grow by more than $1 billion this year.

With crude prices hovering around $64 a barrel, it's no wonder a Merrill Lynch airline analyst downgraded the company's stock rating Tuesday from neutral to sell -- and predicted the nation's No. 3 airline and Salt Lake City's largest carrier probably will file for bankruptcy between now and mid-October.

In a widely circulated research note, Merrill Lynch analyst Michael Linenberg said Delta has been in talks with creditors about additional funding since early this year. But escalating oil prices could keep lenders on the sidelines until after the bankruptcy filing.

"We think the recent surge in fuel prices greatly increases the likelihood of a bankruptcy filing within the next two months," Linenberg said.

His comments sent the company's stock to $1.95 a share, a 13 percent drop from the day before and the first time the price has dipped below $2. Prior to the fall, Atlanta-based Delta's stock was already at a four-decade low.

After losing nearly $10 billion since 2001, and with harsher bankruptcy laws set to take effect Oct. 17, speculation has been growing that Delta, which employs almost 4,000 people in Salt Lake City, is teetering on the brink of a Chapter 11 bankruptcy.

Pressure has mounted steadily since July 21, when the company reported its latest quarterly loss -- a $382 million shortfall caused mainly by a gigantic $385 million increase in jet fuel costs during the same quarter of last year.

If that weren't bad enough, Chief Executive Officer Gerald Grinstein sent a memo to employees five days later, saying efforts to pare $5 billion in annual costs from the company's expenses by next year might not be enough to avert a Chapter 11.

The company is burning cash to the tune of about $2 million a day. As of June 30, it had $1.7 billion in unrestricted cash to pay bills. But the company's fuel bill threatens to wipe out the $1 billion of concessions provided by its pilots last year and other cost-cutting measures.

Delta also has a mountain of debt and is facing a $450 million payment to its underfunded pension plan by year-end, leading to the growing view that a bankruptcy petition is close.

"Without pension relief, and without the sale of assets, it's imminent," said Ray Neidl, an airline analyst with Calyon Securities (USA) in New York. "If they do get pension relief and sell assets, they will be able to get through the winter. If not, then they'll seek protection between Labor Day and Oct. 17, when the bankruptcy laws change."

On Monday, Delta named a new treasurer after its previous treasurer left the company. And J.P. Morgan analyst Jamie Baker said in a research note that "another potential shock" is close with Delta's quarterly filing to the Securities and Exchange Commission. Delta is delaying the report because a new credit card processor is requiring a "significant" cash reserve at the start of the contract, according to an SEC filing. Processors require airlines to pledge more cash when there's a greater risk that they won't be paid for tickets for flights not yet taken. Merrill Lynch's Linenberg said the cash holdback could be as much as $400 million.

Delta refuses to discuss that and other analyst predictions. The company concedes a bankruptcy reorganization might be necessary if financial pressures don't ease. But officials say the preferred route to financial health is outside the courtroom.

"We continue to do everything we can to be financially responsible in our effort to remain out of a court-ordered restructuring," Delta spokesman Anthony Black said.

The airline has played a visible role in Utah since 1987, when it took over Western Air Lines and absorbed its Salt Lake City hub. Today, Delta employs 3,900 pilots, mechanics and other workers, making it the third-biggest private employer in Salt Lake County and a top-10 private employer in the state.

With 398 daily flights to 91 destinations, Delta and its affiliate airlines control 80 percent of departures and 75 percent of passenger traffic at Salt Lake City International Airport.

While Delta faces pressure from several directions, its biggest headache is fuel payments. The company raked in $7.8 billion in revenue during the first six months of this year, but spent more than $1.9 billion on aircraft fuel. That's equivalent to a family with a $50,000 household income spending roughly $12,000 to fill up its cars.

Delta's pension fund also threatens to drag it down. Last spring, the carrier said it faced $3.1 billion in pension payments over the next three years. It has paid $315 million this year. But many analysts believe Delta will be forced into Chapter 11 if Congress doesn't pass meaningful pension reform soon.

Delta supports legislation proposed in April by Sen. Jay Rockefeller, D-W.Va., and Johnny Isakson, R-Ga., that would give U.S. airlines the option of spreading their pension payments over 25 years instead of four. An amendment, co-sponsored by Rockefeller and Sen. Trent Lott, R-Miss., would reduce the period to 14 years.

In return, the airlines would limit their future pension liabilities by freezing retirement benefits. Employees would be eligible for benefits earned up to the time of the freeze. But they could accrue no additional benefits unless the airline paid for them immediately.

Merrill Lynch's Linenberg said he doesn't expect Congress to act before late September at the earliest. It's more likely that Delta will turn to the bankruptcy court if its unrestricted cash reserves fall below $1.4 billion.

"We think the probability of a Delta bankruptcy filing has grown, and we think investors should be mindful of Oct. 17, when more restrictive bankruptcy legislation becomes effective," Linenberg said. "That could be a key factor in any potential Delta bankruptcy filing."

DELTA WOES:

--What happened: Delta Air Lines' stock fell to a new 43-year low Tuesday, raising new fears that Delta will file a Chapter 11 bankruptcy soon.

--Why: A Merrill Lynch & Co. analyst downgraded Delta's stock from neutral to sell, citing ever-increasing oil prices.

--What's next: Delta said Tuesday that it will put off reporting its latest financial results to the Securities and Exchange Commission.

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DAL,

Source: The Salt Lake Tribune

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