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Delta Rushes to Sign Up Credit Card Processor But 'Substantial Cash Reserve' is Needed

Posted on: Thursday, 11 August 2005, 09:00 CDT

Delta Air Lines, struggling to avoid a bankruptcy filing, is facing a fresh crisis as it tries to conclude critical talks for a deal with a new credit card processing company.

Without a deal, Delta would not be able to accept Visa or MasterCard credit cards in payment for tickets, which could cost it business. To focus on the talks, the airline has delayed a regulatory filing. The disclosure, made on Tuesday by Delta, came after its shares sank amid new fears that it would have to seek Chapter 11 bankruptcy-law protection.

Shares of Delta closed at $1.95, down 28 cents, or 12.6 percent, a new low for the stock, which has lost more than half of its value in the past month.

An analyst at Merrill Lynch, Michael Linenberg, cut his rating on Delta on Tuesday to "sell" from "neutral," saying the chances of a bankruptcy filing within two months had greatly increased. A number of senior executives have left in recent weeks, including its treasurer, chief financial officer and Washington lobbyist.

The gloomy developments prompted speculation within the industry and by Wall Street analysts that the airline would be forced to seek more concessions from its employees, including its pilots, who granted Delta $1 billion in wage and benefit cuts last year, allowing it to avoid a bankruptcy filing.

But Delta and the Air Line Pilots Association said on Tuesday that the airline had not asked for more cuts. Still, any savings could not come quickly enough to offset the potential cash crisis in which the airline finds itself.

Delta said on Tuesday that a new credit card processing company, which it did not name, was asking for "a substantial cash reserve" to handle Visa and MasterCard transactions. Their proposed deal is set to take effect on Aug. 29, and Delta would need the money by then.

Delta, the third-largest U.S. airline, behind American and United, said it was looking for alternatives to putting up some of the requested reserve. But the airline said it could not guarantee that it would find them.

Because of the discussions, Delta requested a delay for submitting its second-quarter results to the U.S. Securities and Exchange Commission. It had planned to file the results on Tuesday. It now must file them results by the beginning of next week.

A spokeswoman for Delta, Chris Kelly, said on Tuesday night that the airline planned to meet the new deadline, meaning that it would wrap up its deal with the processor by then.

Delta has held talks for months with lenders including General Electric and American Express, which could help it by agreeing to more flexible terms or by providing additional financing. Delta could also seek help from aircraft companies.

The latest terms of its agreement with American Express require Delta to have $1 billion in cash on hand. Delta ended the second quarter with $1.8 billion, theoretically giving it an $800 million cushion.

But the second quarter is usually the best in terms of cash for the major airlines, as passengers pay in advance for summer vacation trips.

In his research report, Linenberg said record prices for jet fuel could cost the airline $1 billion more this year, essentially offsetting the concessions it won from its pilots last year.

He estimated that Delta's fuel costs had already risen $400 million this quarter.

Linenberg said Delta would have to seek bankruptcy-court protection if its cash fell below $1.3 million.

Source: International Herald Tribune

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