As Delta Air Lines continues to push forward on a top-to-bottom review and assess the necessity of Chapter 11 bankruptcy restructuring, its chief executive this month told employees that required cost savings estimates formulated last year won't be enough. Delta is one of several major U.S. carriers in financially dire straits as the industry continues a painful evolution toward the low-cost, low-fare model. Considering high fuel costs and a prolonged period of weakened revenues—even amid increasing demand—several of the industry's biggest players now are reevaluating cost targets and proposed business models.
Increasing traffic numbers at all U.S. carriers, at least, suggest the traveling public is not avoiding troubled airlines. Though financial stability is a concern for corporate travel managers, many of the airlines' corporate accounts generally do not jump ship at the possibility, or even reality, of bankruptcy unless their preferred carrier begins scaling back service on heavily traveled city pairs.
"It is no secret that our situation grows more urgent with each passing day," said Delta CEO Gerald Grinstein. "It is painfully clear that last year's estimate of the cost savings we will need if Delta is to survive and compete is no longer valid. Instead, the hole has deepened during the intervening months."
He cited a $680 million annual increase in fuel costs, continued yield deterioration and six credit rating downgrades since May 2003 that "make it more difficult and prohibitively expensive to access the capital markets."
Though Grinstein said the company "is heartened" by positive overtures from Delta's pilots union, and recognized the crucial need for labor cost cuts, he said, "A business strategy is being developed that does not rely solely on labor cost-cutting measures, but also includes the operational restructuring and innovation we'll need to survive and compete."
Even so, potential pilot concessions are top of mind. "Delta has talked about asking its pilots for $1 billion in concessions. At this point, they are the highest paid pilots in the industry, and we notice that they are retiring at a rate of more than 300 per month," said Helane Becker, analyst with The Benchmark Co., in a recent note to investors. "Obviously, the pilots are worried about a Chapter 11 filing at Delta, which we continue to believe is increasingly likely, especially if oil prices stay in the range of $35-$40 instead of in a range of $30-$35, and even that is too high."
Delta already cut $1.8 billion from its cost structure, but Grinstein said "costs continue to outpace revenues, with no improvement in sight." He will present the restructuring plan to Delta's board in late August.
"We need to think less traditionally on the sales front, but also generate the revenue we need and deal with strategic corporate partners," said Pam Elledge, Delta's new vice president of sales and distribution
(see story). She suggested the airline may "need to revisit how we price and structure agreements" and that Delta's domestic alliance with Continental and Northwest "will undergo a considerable amount of reworking as we look to meet cost pressures."
US Airways also desperately is trying to avoid bankruptcy court, which it last visited in March 2003 when it emerged from an eight-month restructuring. "We haven't yet closed the books on the second quarter, but it looks like there may even be a chance that we break even," said CEO Bruce Lakefield, in a message this month to employees. "While that's a glimmer of good news, remember that the second quarter is traditionally US Airways' strongest, and we count on it to help carry us through the year."
Lakefield added that the outlook for full-year 2004 "is clouded" and that sizable third- and fourth-quarter losses should be expected "if we don't get labor cost reductions we have targeted." Without a lower cost structure, he said, US Airways runs "the real risk" of defaulting on a loan package backed by the federal government and "could just run out of steam sometime next year."
Lakefield noted financial challenges at other major network carriers, including Delta. "Even American Airlines, which narrowly avoided bankruptcy last year, apparently needs to go back to the drawing board with its restructuring," he said, referring to press reports quoting the former president of the Allied Pilots Association suggesting American's turnaround plan is $1 billion behind schedule.
As US Airways tries to steer clear of bankruptcy court, domestic partner United Airlines is trying to drive itself out. Unlike US Airways, it will have to do so without a federal loan guarantee now that the Air Transportation Stabilization Board definitively rejected United's application.
That final ATSB rejection likely will prolong UAL's Chapter 11 bankruptcy reorganization and force the company to use its own devices—notably additional cost cuts—in securing financing necessary for emergence from court protection. One source of fresh capital could come from asset sales, though at this point it is unclear if, or to what degree, United plans to shrink its global network.
"While we disagree with their decision, we are gratified by the ATSB's public recognition of our progress and are already moving forward to secure the exit financing we need to take United out of bankruptcy," UAL said in a statement. "The message from the ATSB is that we can get the exit financing we need on our own."
United last week deferred a decision on whether it would pay the $72 million quarterly minimum contribution to its pension plans due July 15. The company said the deferral enables it to "best manage its resources and preserve its options as it works to secure the exit financing necessary" to emerge from bankruptcy protection. Analysts have said UAL may opt to cut pension plans as part of its reorganization.
The situation north of the border is slightly more clear for United's Star Alliance partner. Air Canada's creditors will vote Aug. 17 on a restructuring plan that would help the carrier emerge by Sept. 30 from court protection. The judge overseeing the bankruptcy case this month approved an investment plan by a unit of New York investment firm Cerberus Capital Management, which will buy a 9 percent stake in Air Canada for C$250 million (US$189 million).
Most of Air Canada's labor groups, including all those representing mainline employees, by this month had ratified new agreements necessary for the carrier to satisfy conditions laid out by Deutsche Bank and GE Capital Aviation Services, the airline's major financial backers.