Questions remain as Delta hub is set to close
By Trebor Banstetter
Star-Telegram Staff Writer
Delta Air Lines enters a new era Monday when it closes out its 75-year history as a major North Texas air carrier.
The question is whether that era will be one of recovery for the struggling airline or a road that leads to bankruptcy.
"We are worried about cash burn in the first half [of 2005] that could make the possibility of a bankruptcy filing more likely and sooner than we had expected," said Kimberly Noland, an analyst with the independent research firm Gimme Credit, in a recent report.
Delta, the world's third-largest carrier, officially shuts down its hub at Dallas/Fort Worth Airport on Jan. 31. The move is part of a strategy that Delta executives hope will revive the ailing carrier, which recently posted the worst financial loss in the history of the airline business.
Delta is carrying out a sweeping realignment of its routes, covering more than half its total network.
The carrier is also eliminating up to 7,000 jobs over the next 18 months, cutting pilots' salaries and freezing their pension plan, and drastically slashing prices on last-minute fares.
The new strategy has had major implications for North Texas. Travelers have lost access to 233 daily flights, and the local economy must absorb the elimination of 3,600 jobs -- a hit that one economist recently predicted could cost the region's economy $782 million.
Delta's reduction at the airport has also revived discussions of eliminating the Wright Amendment, which restricts long-haul service from Dallas Love Field.
Executives with Dallas-based Southwest Airlines said the hub closure has left a void that they would like to fill with expanded service from Love. Meanwhile, one thing that many feared -- higher fares on some routes as competition lessens -- hasn't come to pass.
When Delta announced the hub closure in September, some predicted that fares at D/FW would get pricier because of less competition for American Airlines, which is the airport's largest carrier.
But that was negated when Delta rolled out its new fare structure last month that reduced last-minute fares by up to 50 percent. That's a significant savings for business travelers, who most frequently buy last-minute tickets.
American Airlines, which dominates the airport, quickly matched Delta's move with a similar fare structure. The new prices applied to American flights nationwide, including at D/FW.
"Delta's new pricing changed everything," said Tom Parsons, chief executive of Bestfares.com, an Arlington-based Internet travel firm.
"American has probably been the most aggressive against Delta, and that's spilled over to their fares at D/FW," he said.
It remains to be seen, however, whether Delta's ambitious turnaround plan, which has shaken up the entire industry, will be enough to keep the airline out of bankruptcy.
Roger King, an analyst with research firm CreditSights, said the airline is returning "to a bankruptcy watch."
In a report on the airline, King said Delta's best chance to stay out of bankruptcy this year is a pension overhaul, which would reduce its costs, and the liquidation of rival US Airways.
"That would spell some relief and buy more time, even if it delays the inevitable," he said.
Analyst Noland said that Delta is burdened with huge debt and is more vulnerable to low-fare rivals than other major hub carriers.
"Delta's fourth-quarter performance was at the bottom of the barrel for the struggling group," she said.
Ray Neidl, an airline analyst for Calyon Securities, said he is concerned about Delta's cash reserve. The airline had $1.8 billion in unrestricted cash at the end of 2004.
That could be reduced to $1.4 billion by the end of the first quarter, "which we do not believe is a sound level," he wrote in a research note.
The challenge for Delta is to cut its spending fast enough to compensate for the reduction in revenue that will come from its cheaper fares. In addition, fuel prices are expected to remain high, and discount airlines will keep the pressure on all fare levels in 2005.
"We know the road ahead is at least as long and difficult as the distance we've already come," said Gerald Grinstein, Delta's chief executive, in a recent conference call with reporters. "We must develop a fundamentally different way of doing business if Delta is to survive."