Delta Likly To File

[ohcaptainron]

Delta Air to Take a Big Charge

By Eric Gillin
TheStreet.com Staff Reporter
7/13/2004 12:22 PM EDT
Click here for more stories by Eric Gillin

Updated from 8:21 a.m. EDT

Less than a week before it reports second-quarter earnings, Delta Air Lines (DAL:NYSE - news - research) shares fell 6.1% Tuesday after the company said it will take a $1.65 billion non-cash for the reporting period.

The beleaguered carrier, which needs to wheedle wage concessions from pilots in order to stave off a bankruptcy protection filing, said the bulk of the charges, $1.53 billion, is related to deferred income taxes. Essentially, the company has stopped recognizing income tax benefits going forward, with Delta saying it does not know when it will be able to generate sufficient taxable income to use its deferred income tax assets.

As Delta struggles, employees are leaving the company. The remaining $117 million in charges covers a settlement related to the company's defined benefit pension plan for pilots because of higher-than-average retirements. The company, which releases earnings this coming Monday, stressed that the charges will not affect its June 30, 2004, cash position.

In reaction, shares of the carrier fell 41 cents to $6.34.

The situation at Delta is growing so dire that Citigroup Smith Barney analyst Daniel McKenzie cut his price target on the carrier to $1 on Monday night, citing the government's decision to deny United Airlines, unit of UAL (UALAQ.OB:OTC:BB - news - research), a loan guarantee.

"We think the risk of Delta filing for Chapter 11 have substantially increased, particularly with fuel continuing to hover near peak levels," wrote McKenzie, in a research note. "Despite encouraging news from the Delta pilots union on concessions, we think labor uncertainty increases for Delta following the UAL loan guarantee denial." (Citigroup Smith Barney does and seeks to do business with the companies covered in its research reports.)

Furthermore, McKenzie warned current Delta shareholders that they may not see the kind of appreciation enjoyed by AMR (AMR:NYSE - news - research), parent of American Airlines, whose shares skyrocketed after employees agreed to wage cuts just over a year ago. In his view, Delta's hub markets face too much low-cost competition from AirTran (AAI:NYSE - news - research) and JetBlue (JBLU:Nasdaq - news - research) and the company's underfunded pension plan will divert cash it could use to repair a debt-laden balance sheet.

 

[coolflyingfool]

This is not good. This thread should probably be moved over to the Delta block. Enough problems here right now.

 

[WorldTraveler]

This belongs on the Delta forum.

Mr. Gillen can't seem to make up his mind what he thinks about Delta. He wrote the following just 30 minutes after the above:

We think it is prudent to become more cautious on AMR, given our view that UAL (UALAQ.OB:OTC:BB - commentary - research) and Delta Air Lines (DAL:NYSE - commentary - research) will ultimately end up with a cost structure materially lower than AMR within the next year, thereby leaving AMR at a competitive disadvantage," the analyst wrote in his downgrade. (Citigroup Smith Barney does and seeks to do business with the companies covered in its research reports.)

A non-cash charge says nothing about a company's expected viability. Most of UAL's net losses over the past year have been non-cash charge related and not operating losses; these type of charges are necessary from an accounting standpoint but don't affect Delta's viability as a company. In its release, Delta noted that every other network airline has already taken a charge against tax benefits; as with many aspects of the current cycle of industry restructuring, Delta is behind the other carriers but that doesn't mean they are preparing for failure - bankruptcy included.

 

[WorldTraveler]

Delta has taken an increasingly strong number of steps to get the pilot's and other creditors' attention and bring them to the point of negotiating real concessions. I don't know how many other tactics Delta has but they will continue to use them; yes, there are accounting regulations but obviously there is some flexibility in deciding when to comply/how to interpret since DAL is just now taking this charge. This is just one more step that Delta has used to make the point that its situation is dire but not yet out of its control. It clearly will increase the amount of negative press about Delta but that all can be quickly turned around with a viable restructuring plan which includes the pilots. Once Delta walks into bankruptcy court, control has been lost and chances of a successful restructuring dramatically decrease. It behooves the Delta pilots and creditors to give meaningful concessions to avoid a bankruptcy filing since history and current events clearly indicate that employees never win in a bankruptcy filing and always fare worse in bankruptcy than they do outside of it; creditors, esp. of the unsecured kind, don't fare much better.

 

[Fly]

So, you don't like it when analysts bash YOUR airline but you feel it's perfectly acceptable to bash ours. Oh well, enjoy it while you can, you're the next contestant.

 

[The Ronin]

Unfortunately you are going to find that ALPA is going to bleed your company until the last minute. But if their past timing is any indication, that might be one minute AFTER the BK filing.

 

[WorldTraveler]

I have no interest in seeing any airline fail. Since none of us will know until after the fact, we all have to speculate but I really don't think Delta pilots are going to walk into the mess that US and UA pilots are in. If by the end of the summer I'm wrong, send me a PM and I'll send you a coupon for a beer at your nearest brewpub. It's not a question of "mine" and "yours", it's a question of people learning from each other's mistakes. I would rather than UA and US not to have made their mistakes, but they have. Humans don't always learn from history but with the current situation so fresh in all of our minds, I'm rather optimistic that Delta pilots will figure out how to stay employed and paid.

 

[The Ronin]

Ahhhh...Fly you O.K. there?

 

[LiveInAHotel]

Maybe Delta shouldn't have jumped on the low-cost carrier band wagon? They spent millions to create that circus in the sky they call Song. I hope the DL Pilots stand strong and unified and vote NO on concessions. It's time to teach the greedy CEO's who run our carriers.

 

[The Ronin]

HAHAHAHAHAH...... Now that's a funny post

 

[WorldTraveler]

Hotel,
I'm not a particular fan of Song or any airline within an airline. However, I'll give Delta and United the time to prove whether they can make their little subsidiaries work.

Tell me what you honestly think will happen if the pilots refuse to offer concessions? While I'm not a fan of the huge disparity between executive and frontline worker pay, I'll remind you that airline CEOs typically make on the order of less than 5X the highest paid non-management employees (pilots) and in Delta's case Mr. Grinstein is taking a salary that is less than 2X the highest pilot salaries. Those kind of multiples are well below what management makes in other industries; if you want to argue that airline executives are overpaid, then you probably also have to make the same argument about pilots.

 

[luv2fly]

While I'm not a fan of the huge disparity between executive and frontline worker pay, I'll remind you that airline CEOs typically make on the order of less than 5X the highest paid non-management employees (pilots) and in Delta's case Mr. Grinstein is taking a salary that is less than 2X the highest pilot salaries.

Is that before or after the 40%+ pay cut he is proposing to the pilot group?

 

[LiveInAHotel]

Is that before or after the 40%+ pay cut he is proposing to the pilot group?

Don't forget those multi-million dollar bonuses either! 😉

The DL pilots actually already offered a 9% paycut plus the 4% pay raise the recently received. Grinstein said no to the pilots offer and he would take nothing less then 30%.

 

[737nCH11]

Ronin,

You forgot to add that Delta's mechanics might vote "no" on a concession package and risk throwing the company into CH11 ala UAL. Wait a minute, I forgot they're not IAM, so hopefully they don't have the typical arrogant IAM attitude. Time will tell.

 

[scot]

Once again, since the moderators are busy people, instead of posting a reply to move things in a thread, if you would kindly send a note reporting the post (along with the fact its in the wrong forum), we'd be able to take care of things faster since we'd be aware of a problem instead of stumbling on it while searching the posts. Moving to the DL forum.
Thanks.