$600 million on Delta's horizon
American Express will try to help airline avoid bankruptcy, but only if
deal with pilots is reached.

By RUSSELL <mailto:rgrantham@ajc.com>  GRANTHAM
The Atlanta Journal-Constitution
Published on: 10/25/04

Juggling deals in a bid to avoid a bankruptcy filing as soon as this
week, Delta Air Lines said Monday it has a commitment for up to $600
million in much-needed cash from credit card giant American Express.

But the deal is conditioned on Delta also getting a long-sought pilot
pay cut deal, and talks between the airline and its pilots union
continued into Monday evening without an agreement.

The deal with American Express includes a $100 million loan that Delta
said is part of a package still being negotiated with other unnamed
lenders.

American Express also agreed to prepay Delta $500 million toward its
purchases of SkyMiles over the next two years, according to Delta.
American Express issues SkyMiles to users of a Delta-branded credit
card.

Wall Street welcomed the news as a sign of progress in Delta's effort to
stitch together enough deals with pilots, bondholders and other
creditors to avoid a Chapter 11 case after three years of huge losses.

"It indicates that Delta, under certain circumstances, can find
capital," said Richard Bittenbender of Moody's Investors Service. He
said the deal will boost cash reserves and send a positive signal to
pilots and other parties.

Delta shares - which probably would be wiped out in a bankruptcy case -
rose almost 17 percent, to $3.78.

However, in a regulatory filing that accompanied Monday's announcement,
Delta acknowledged that the deal includes protections for American
Express if it goes into bankruptcy court anyway. Delta said it would ask
the court to put Amex at the head of the line for future repayment.

Delta and pilots union negotiators resumed discussions Monday afternoon
at the Air Line Pilots Association headquarters outside Washington. They
had several days of talks in Florida last week.

Union not happy yet

Delta wants a 35 percent pay cut and other savings that would roughly
halve the company's $2 billion pilot payroll.

The union said "significant issues" remained unresolved. "We expect this
process to continue throughout the evening," a spokesman said in a
message to members late Monday afternoon.

Meanwhile, a deadline looms today for another element of Delta's
bankruptcy avoidance efforts - a debt exchange offer in which holders of
certain bonds are being asked to turn them in for ones that mature
later. That would help Delta trim costs related to a nearly $21 billion
debt load.

A similar exchange offer last month drew tepid response, but some bond
analysts expect this one to do better.

Delta has said it also is in private talks with other debtholders,
aircraft lessors and vendors as part of an effort to restructure its
finances without a bankruptcy case.

Trying to buy time

Delta said Monday that it reached a deal to defer for two years $135
million in bonds that were to come due next year. The airline said it
also will issue stock with the new debt, which will be exchanged for
full value.

A bankruptcy filing would let Delta keep flying with little effect on
passengers, but it would shift control over the company's future to a
bankruptcy judge and high-priority creditors.

If Delta gets the pilot concessions and other deals, some analysts think
the airline will buy itself enough time to try to let its recovery plan
work without a trip to court. The airline recently laid out plans for up
to 7,000 job cuts in coming months and 10 percent pay cuts for remaining
workers. It's also closing its Dallas hub this winter.

But others note that record fuel prices and persistent fare wars
undercut such cost-cutting steps, and they regard a Chapter 11 case as
likely in any event.

Delta last week posted a $651 million third-quarter loss and said its
cash has dipped below the $1.5 billion mark that analysts think means a
bankruptcy filing is imminent. A lesser amount would give the company
less flexibility during a bankruptcy case.

"As our September quarter 2004 losses demonstrate, time is now very
critical for Delta," Chief Executive Officer Gerald Grinstein said in a
press release. "American Express' role in Delta's transformation process
demonstrates the commitment and determination of one of our key
stakeholders in restructuring the company."

Some Delta watchers say the airline could decide to file Chapter 11 as
soon as Wednesday if negotiations with its pilots and others aren't
going well. But it also could extend today's debt exchange offer and
keep talking to pilots if they are.

The deals have become increasingly intertwined. Like the American
Express financing, the debt exchange is conditioned on a deal with
pilots. At the same time, the pilots union has insisted that other
stakeholders contribute to the company's recovery effort before pilots
agree to cuts.

That means announcements of progress in one area could be aimed partly
at influencing talks in another.

The American Express deal "would indicate good faith to the pilots that
Delta is trying to restructure everything, rather than surviving on the
backs of labor," said Bittenbender.

Unspecified collateral

American Express has a key stake in Delta's future, processing millions
of fare purchases. Delta said it also extended its agreement with
American Express to continue offering a frequent flier credit card.

Delta said it will get the SkyMiles prepayments in two installments of
$250 million each, with the first occurring when all conditions are met
and the second 90 days later.

Delta said it will put up unspecified collateral for the financing from
American Express Travel Related Services.

The airline's cash coffers also stand to get a boost from two announced
asset sales - of surplus aircraft and a stake in Orbitz.com - that
should bring it about $350 million when they close.

Also, airlines have recently raised fares to offset the rise fuel
prices, and that helps cash flow.