Delta, other carriers stalled on the runway

NEW YORK, March 26 (Reuters)

Weighed down by recent jet fuel price increases and and fears of attacks, Delta Air Lines Inc.'s credit is having trouble taking off.


The traditional airlines have been generally battered recently, but Delta's credit has been hit particularly hard because it does not hedge its fuel costs to the same extent as other air carriers, a trader said.


Earlier this month, Delta said it expected its loss this quarter to be about $400 million, up from its previous expectation of $300 million to $350 million, in part due to rising fuel costs.


Delta also has high labor costs, said Alok Makhija,an analyst at DebtTraders, a New York dealer of high-yield and distressed debt.


AMR Corp.'s American Airlines was able to threaten bankruptcy to inveigle its workers to accept lower wages and its plane lessors to accept lower payments, Makhija said.


But with Delta, the threat of bankruptcy, at least in the near term, is not quite as credible. As of Dec. 31, the company had $2.7 billion of cash and cash equivalents on balance sheet.


Delta acknowledged its high costs during its most recent quarterly earnings announcement.


The Atlanta-based carrier, the first major airline toreport results for the last quarter of the year, posted a net loss of $327 million, or $2.69 per share, for the fourth quarter. A year earlier, Delta reported a loss of $363 million,or $2.98 per share. The company has not posted a profit since the second quarter of 2003.


Delta Chief Executive Gerald Grinstein called the fourth-quarter results disappointing, and said, "While we have made progress in addressing challenges, Delta still faces many hurdles in 2004."


A spokeswoman for Delta said on Friday that the company fully intends to meet its debt obligations as they come due,with cash, cash equivalents, investments, internally generated funds, and borrowings.


Grinstein said in January that the airline has begun a complete reassessment of its business -- including its approach to executive pay -- to ensure it remains competitive. As part of that review, Delta did not give top executives cash bonuses
for 2003.


Labor is the biggest cost for the industry, but jet fuel is the second biggest -- and the picture there is not pretty.


Continental Airlines has warned that its plans to break even or turn a profit this year are at great risk due to high jet fuel prices. The airline said on Friday that it was raising its fuel surcharge on some tickets by $10 to $15.


Some credit derivatives traders also raised questions about how strong passenger growth can be this year. 


Passenger air travel is forecast to grow in 2004 for the first time since 2000, according to the Federal Aviation Administration's annual industry forecast released on Thursday. But some traders said those projections may be too rosy, given the recent terror attacks in Madrid.

The cost of buying protection against Delta Air Lines Inc.defaulting on its debt has risen dramatically over the last few weeks, a trader said.


An investor wanting protection would have to pay 40 basis points times the principal upfront, plus 500 basis point a year, for protection. The upfront fee has risen about 15 basis points in recent weeks, he said.

Copyright 2004, Reuters News Service