Delta Air Lines yesterday warned third-quarter losses could reach $675 million as "financial performance continued to deteriorate" amid yield erosion and high oil prices. Struggling to avoid bankruptcy, the company in a Securities & Exchange Commission filing said, "We have substantial liquidity needs and there is substantial uncertainty as to whether we will be able to obtain the necessary financing to meet those needs on acceptable terms or at all."
All U.S. airlines are under heavy pressure from escalating fuel costs and hypercompetitive pricing. Most major carriers next week will report third-quarter earnings that generally will be worse than initially anticipated and those not already in bankruptcy protection are taking steps to avoid it. Northwest Airlines, for example, yesterday announced a new, tentative agreement with pilots. For its part, bankrupt US Airways yesterday received a short reprieve from losing access to hundreds of millions of dollars necessary for it to continue operations.
Meanwhile, Delta management continues negotiating with the Air Line Pilots Association on a cost savings plan central to the company's aspirations for an out-of-court restructuring. Delta said union offers to date "have been for substantially less" than the $1 billion in annual savings Delta has proposed.
Nevertheless, J.P. Morgan Securities analyst Jamie Baker, in a research note this morning, said ALPA is "expected to deal any moment now," though Delta "appears over $600 million away from its savings target, with time not on its side." Baker left unchanged his 70 percent probability of a Delta Chapter 11 filing by year-end.
In a company statement issued this morning, Delta said it would not conduct a usual conference call to discuss third-quarter results, which will be posted next week.
Also trying to avoid a Chapter 11 filing, Northwest Airlines yesterday achieved what its SkyTeam partner thus far has not: a tentative agreement with ALPA. The deal would generate a total of $300 million in annual cost savings and revenue enhancements, including $265 million in pilot wage and benefit concessions. The ALPA Master Executive Council now is reviewing the two-year agreement. Should the MEC approve the deal, it then would need ratification by union membership. The deal also is contingent on Northwest restructuring a revolving credit facility of nearly $1 billion.
"Given the relatively lucrative wage rates, we expect the rank-and-file to quickly ratify by the end of next month, subject to the contingency that Northwest renegotiate its $975 million revolving credit facility," Baker said. "We believe it will, as it's long been our assumption that the primary impediment to doing so was its lack of pilot progress."
Northwest still must hammer out new agreements with other labor unions, including the mechanics, which Baker termed "the most militant" of the carrier's labor groups. "We expect those negotiations, set to begin next year, to turn decidedly ugly."
Already inside bankruptcy court for its second restructuring in just over two years, US Airways won a short reprieve yesterday when the judge overseeing its restructuring approved a new deal between the airline, its lenders and the Air Transportation Stabilization Board. The deal enables the airline to continue accessing nearly $750 million in restricted cash that had been set aside as collateral for a loan package backed by the federal government. Access to those funds had been set to expire today. In bankruptcy court documents filed this week, US Airways detailed "an immediate need to have continued access to the cash collateral in order to continue operations."
In exchange for the extension, set to expire Jan. 14, US Airways agreed to numerous conditions, such as achieving specific pre-tax earnings targets and maintaining a weekly minimum unrestricted cash balance. It also must achieve lower labor costs. The carrier previously requested authorization to impose interim labor cost reductions under section 1113(e) of the bankruptcy code. The judge is expected today to rule on that motion.
This is the second time ATSB has adjusted loan terms to provide US Airways breathing room. The first was this spring when a split decision among the three-member panel loosened restrictions tied to a $1 billion loan package US Airways used to emerge from bankruptcy in March 2003
(BTN, March 29).
Meanwhile, US Airways pilots continue voting on a new tentative agreement that would save the company $300 million annually
(BTN, Oct. 4). Voting is scheduled to end next week.