Delta Digs Up Dual Deals To Delay Chapter 11
Delta Air Lines yesterday announced two new agreements that provide some wiggle room in the carrier's last-ditch efforts to avoid a bankruptcy filing. One, with American Express Travel Related Services Co., includes $600 million in financing, while the other defers $135 million in debt from next year to 2007. Both deals preceded a likely agreement with the Air Line Pilots Association that analysts said is imminent.
J.P. Morgan Securities analyst Jamie Baker said the latest developments are "likely to dissuade" Delta's board from pursuing bankruptcy, at least for a few months. He reduced his near-term Chapter 11 probability from 85 percent to 30 percent.
The deal with Amex includes $500 million in prepaid Delta SkyMiles, paid in two equal installments, and a loan of up to $100 million. Various conditions apply to the American Express commitment, including Delta's successful completion of negotiations with the pilots' union, restructuring of debt and finalization of a new credit facility. Helane Becker, analyst with The Benchmark Co., said the transaction is similar to previous ones between airlines and credit card companies.
In a discussion with analysts and investors yesterday, American Express Chief Financial Officer Gary Crittenden acknowledged the risks inherent in the agreement but deemed them manageable. "The total credit line is completely secured. We have what we believe to be very sound collateral that would take into account this entire obligation that they have to us," he said.
As part of the agreement, Delta also signed four-year extensions with American Express on partnerships covering a co-branded credit card, the airline's participation in the Amex Membership Rewards program and a merchant services relationship.
"While American Express' Delta SkyMiles Credit Card co-brand portfolio accounts for less than 10 percent of the company's total worldwide billed business and less than 15 percent of managed worldwide lending receivables, it represents a very attractive, high-spending, loyal card member base with excellent credit quality," American Express said in a statement. American Express worldwide billed business-spending on American Express cards, including cards issued by third parties-was $352 billion, according to the company's 2003 filing with the Securities and Exchange Commission.
"We are really quite confident about this arrangement being a strong commercial success for American Express," said Crittenden. "We're helping a partner that we value highly and, in return for that, we're getting an extension of our relationship that will take us into the next decade."
American Express yesterday also announced third-quarter earnings of $879 million, up 14 percent on 12 percent higher revenues. The Travel Related Services division reported quarterly net income of $726 million, up 20 percent. It cited the Rosenbluth International acquisition, increased travel sales, higher commission payments and strong growth in spending and borrowing on American Express cards for the growth.
"American Express' role in Delta's transformation process demonstrates the commitment and determination of one of our key stakeholders in helping to restructure the company," said Delta CEO Gerald Grinstein.
Nevertheless, the new deals have not eliminated the risk of bankruptcy and won't go into effect unless Delta and ALPA finalize concessions totaling $1 billion. "Delta's future boils down to the pilots," said The Benchmark Co.'s Becker. "Either they get a deal or they file."
Indeed, J.P. Morgan's Baker said, "Delta is by no means out of the woods," but now with more cash on hand, the company's board "likely is content to pray for the best" rather than press for an immediate bankruptcy filing.