UPDATE: Delta Pilot Deal Opens Door For Restructuring
By ELIZABETH SOUDER
November 1, 2004 3:40 p.m.
Of DOW JONES NEWSWIRES
NEW YORK -- Delta Air Lines Inc. (DAL) on Monday announced a $500 million loan from GE Commercial Finance as a tentative pilot contract allows the airline put fresh financing in place.
Last week, the Atlanta airline reached a tentative contract agreement with pilots to cut $1 billion in annual labor costs. The deal is a major piece of Delta 's plan to restructure outside of bankruptcy protection, as other financing and debt restructuring deals are contingent upon pilot cost cuts. But, as airline experts and Delta executives both say, the pilot agreement doesn't guarantee avoidance of a Chapter 11 filing.
Delta continues to hammer out financing deals, like the GE loan, that, along with cost savings such as the pilot deal, give an immediate boost to the airline's cash level.
But so far Delta hasn't said much about efforts to address its nearly $20 billion debt load. The airline has been silent about whether holders of unsecured debt are tendering their securities in an exchange offer.
"Delta 's financial situation is still precarious and uncertainties remain," Delta Chief Executive Gerry Grinstein said Friday in a message to employees. "All the puzzle pieces must come together in time."
He added: "While there are no guarantees, we are making good progress."
Analysts said the pilot deal is key to implementing the rest of the restructuring plan, which involves cutting $5 billion in annual costs by 2006, negotiating with debt holders, vendors and financiers, and rescheduling flight operations to boost productivity. But even with a pilot contract - which still must be ratified by union members - Delta has work to do.
"Delta is not out of the woods yet, but, if this agreement is approved, we believe Delta will be well on its way to avoiding bankruptcy, at least for the time being," Calyon analyst Ray Neidl said in a research note.
On Monday, Delta said GE will provide $300 million in financing in a senior secured revolving credit facility and $200 million in a senior secured term loan.
The airline said in a press release that $100 million of the financing will come from American Express Co. (AXP). That's part of a previously announced $600 million deal with American Express in which the financier agreed to prepay for Delta for a credit card loyalty program. The Amex deal was contingent upon a new pilot agreement.
Delta had said its cash level dropped just below $1.5 billion as of the end of the third quarter, reaching a threshold that analysts have said could trigger a bankruptcy filing.
William Rochelle, a bankruptcy lawyer and airline expert with Fulbright, said the new financing may boost cash, but it doesn't address Delta 's debt and retirement liabilities. The airline still has to negotiate with debt holders, lessors and vendors for better terms, arrange debtor-in-possession financing and address a huge pension burden before the restructuring process is finished, Rochelle said.
"Bankruptcy still very much remains a possibility," he said. "I don't think I've ever seen a company so careful to say it ain't a done deal."
Delta last month extended and sweetened an offer to exchange $2.2 billion in unsecured notes and $471 million in enhanced equipment trust certificates for $680 million in secured notes. Holders that tendered their debt by Oct. 26 received the sweetest deal, although the offer doesn't officially end until Nov. 18.
Delta won't say how much of the debt has been tendered. The offer was contingent upon Delta reaching a deal with pilots, among other things.
Separately, the airline has also deferred some debt payments.
Rochelle, the bankruptcy lawyer, said Delta may even have to ask pilots for more concessions or cut pensions to remain competitive if rival UAL Corp. (UALAQ) is successful in its attempts to close its pension plan.
As of the end of 2003, Delta 's pension plan was underfunded by $5.7 billion, and its plan for other postretirement benefits, such as medical benefits, was underfunded by $2.3 billion.
Further, the 33% wage cut agreed to in the pilot contract would still keep pilot pay slightly above some of Delta 's peers. According to a pilot pay database operated by pilot employment Web site FLTops.com, a Delta 757 captain gets $268 an hour. A 33% wage cut puts the Delta captain slightly ahead of an AMR Corp. (AMR) captain at American Airlines, though below captains at other major carriers. And Delta 777 captains will still be the best-paid in the industry, according to information on the database.
-By Elizabeth Souder, Dow Jones Newswires; 201-938-4148; elizabeth.souder@dowjones.com