SVQ,
thank for participating in the conversation.
In my mind, there are 3 things that are necessary for financial stability: revenue, costs, and balance sheet. The first two obviously have to be in some sort of equilibrium such that an entity is profitable. Businesses can lose money for a period of time as long as there is some strength in the balance sheet.
Delta entered the post 9/11 period with one of the best balance sheets in the legacy segment of the industry. They also have historically been one of the best airlines at cost control, although they lost complete control of that during the Mullin era. Where Delta has consistently lagged the industry is in revenue production. DL has had both a much higher exposure to domestic and LCC markets with a corresponding lack of business and international markets. DL has also carried more connecting traffic than any other airline which made sense until fares came down so low that such traffic can barely be profitable on a nonstop basis let alone when it has to connect. Further, DL has used big aircraft on their domestic system which has necessitated carrying low yielding passengers in order to keep their assets functioning.
Since UA entered bankruptcy and AA initiated its restructuring, DL has been in the position of having a disadvantage on all 3 counts of the financial pillar: high costs, weak revenues, and a weak balance sheet. My optimism this week is because DL finally corrected one of the three pillars to financial stability in that it now has the lowest costs among the legacy segment, retaking its long standing position. Note that it took only six months to do.
What DL has to do is correct the revenue aspect which means quit hauling connecting low yielding passengers to Florida which means alot of capacity has to come out of their domestic hub system. They are doing that and say that there will be even more steps taken this fall to shift capacity to higher yielding local business type markets and out of lower yielding connecting leisure markets. I'm not sure of the current 737 classic count although it was about 75 last year but all of those planes will come out of DL's system in the next 18 months according to DL. 757s are moving to Song for point to point leisure flying while some 767s are being converted to international. In total, there is a significant amount of capacity that is in line to be reallocated over the next 18 months but I am confident DL knows what to do and will make it happen.
The balance sheet is the most troublesome to me as it is to most people. However, every creditor recognizes that they are better off working with a company outside of bankruptcy than to force them into bankruptcy where payments can be tied up for years and negotiations give the debtor far more control. For example, GE as DL's biggest creditor is not likely to lose anything now since they have very good collateral but they could lose in BK if DL is able to reject leases or fails to continue to restructure its business and liquidates. There are many smaller creditors who could lose alot if DL ends up in bankruptcy by being unsecured creditors. Because no one wins in bankruptcy but many people do lose and an aweful lot more risk is injected into the process, I fully expect creditors to work with Delta as long as there is hope of DL turning things around. Given that DL has demonstrated good cost controls and has what sounds like a reasonable plan to change their revenue plan, it is not in anyone's interest to force DL into bankruptcy if the company can be saved outside of BK. My logic is the same for pension reform. However, all of those bills do have to be paid at some point so DL has to become very profitable very soon which will open the possibility that DL can tap into new equity; they have a current shelf offering in place for up to $1B in new financing which they could access if they become profitable. They also have successfully converted several debts into equity and continue to pursue more.
Having the lowest costs which will eventually translate into being profitable makes it far more likely that investors will be willing to help them their balance sheet.
