Delta, Pilots Are Close to Accord
Seeking $1 Billion of Concessions
By EVAN PEREZ
Staff Reporter of THE WALL STREET JOURNAL
October 25, 2004; Page A3
HOLLYWOOD, Fla. -- Delta Air Lines and its pilots union neared agreement on $1 billion in pilot concessions, as the airline prepared a possible bankruptcy-court filing for later this week if a final accord isn't worked out.
Negotiators wrapped up talks yesterday at a Florida resort with the two sides close to an agreement. But significant gaps remained on several top issues, including how large an equity stake pilots would receive in Delta in return for steep wage and benefits cuts. Company officials have prepared to file for Chapter 11 restructuring under the U.S. Bankruptcy Code as early as Wednesday if a deal isn't reached, according to people close to the situation.
The Air Line Pilots Association, which represents more than 7,000 Delta pilots, said its negotiators were headed to the union's national headquarters in Virginia today, and company negotiators were to accompany them to continue the talks. The Delta union's leadership committee also traveled to Virginia for an emergency meeting.
The airline has an initial deadline tomorrow for a debt-exchange offer that it extended earlier this month after a previous proposal received little response from bondholders. The company is hoping more holders respond this time, helping the company to restructure at least a small portion of its massive debt load.
Delta has insisted that any agreement with the pilots save it at least $1 billion a year, while the pilots have pushed for changes in work rules and other contract improvements to soften the pay cutback. One person close to the talks said the union was expected to agree to a pay reduction near the 35% wage cut that management has insisted on.
While the two sides expect to reach an agreement, it hardly lifts the third-largest U.S. airline out of its deep financial hole. Delta has accumulated more than $6 billion in losses since 2001. Delta still is trying to restructure some of its $20.6 billion in total debt, a task made difficult by the fact that much of it is in secured bonds that nearly are impossible to restructure outside of a bankruptcy action.
Even if Delta finds more financial breathing room by halving its annual pilot costs and squeezing smaller concessions from vendors and creditors, it remains in a precarious position -- at the mercy of external shocks such as high oil prices and intense fare competition.
Gerald Grinstein, Delta's chief executive, is insistent a bankruptcy filing can be avoided and that every effort be made to avoid it, according to a person familiar with his thinking. Among his reasons, in the event of bankruptcy proceedings, a creditors committee would hold greater sway over decisions to run the airline. Delta wants to avoid being pressured to follow in the footsteps of rivals in terminating its underfunded pension plans, which would further demoralize its work force. Some of Mr. Grinstein's close advisers believe bankruptcy is unavoidable. Many pilot officials believe a bankruptcy filing is likely even after concessions.
Delta said in a recent Securities and Exchange Commission filing that much of its savings from a two-year-old cost-cutting plan has been eaten up by a surge in fuel prices, declining revenue and increases in pension and other benefits. And it warned that next year, should its latest business model miscalculate costs, it will be back on the brink of a bankruptcy filing.
The two sides have been in talks since the summer of 2003, with little movement until this past summer. Delta remains current with its debt covenants. However, Delta has been watching its cash, determined that if bankruptcy proceedings are necessary, it wouldn't enter them strapped for liquidity as other carriers have.
In recent weeks, Delta's unrestricted cash cushion slipped just below $1.5 billion, which management had set as the cash trigger at which a bankruptcy court filing became imminent. At the negotiating table, Delta hardened its position that it needed two-thirds of its $1 billion in requested concessions in the form of cash savings from pilot paychecks, instead of being able to negotiate productivity improvements that would require less cash from pilots.
The union was pushing for Delta to offer more stock to pilots commensurate with the level of their concessions. Under the company's most-recent proposal, Delta was proposing that as much as 20% of its postrestructuring shares outstanding be in employee hands. Pilot pay at Delta ranges from $50,000 for new hires to $280,000 for senior captains, according to the union.
Write to Evan Perez at evan.perez@wsj.com