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Delta Blues

Airline Headed to Chapter 11, Experts Say

BY TOM MITSOFF

A share of Delta Air Lines stock costs less than a gallon of gasoline.

That's the result of a dive in value of Delta stock combined with the continuing spike in oil prices. Both trends are unrelenting, and have contributed to heightened concerns locally and nationally that the airline that now controls more than 90 percent of traffic at the Cincinnati / Northern Kentucky International Airport may soon file for bankruptcy protection.

Twelve days ago, a Wall Street analyst advised clients to sell their Delta shares on fears the nation's third-largest carrier will file for bankruptcy within the next two months.

Delta stock fell 28 cents that day, or 12.6 percent, to close at $1.95 on the New York Stock Exchange on Tuesday, Aug. 9. The stock price drop continued to a low of $1.31 during the past week, before it rebounded to $1.50 at close of trading Friday.

The company's market capitalization-the total value of outstanding shares-fell to $280 million on Aug. 9. That's less than one-third the amount of discount carrier AirTran Airways, despite Delta being 15 times larger in annual revenue.

Prior to the dip, Delta's stock was already at a 43-year low.

"Greatly Increases the Likelihood of a Bankruptcy"

The decline came after a research note by Merrill Lynch analyst Michael Linenberg, who lowered the Atlanta-based airline's rating from neutral to sell.

"We think the recent surge in fuel prices greatly increases the likelihood of a bankruptcy filing within the next two months," Linenberg said.

Delta also revealed that it may have to put up $750 million of cash reserves to extend a contract with a credit card processing company so it can keep accepting Visa and MasterCard payments for tickets.

J.P. Morgan analyst Jamie Baker said in a research note that a Delta bankruptcy filing by year's end is "all but assured" if the airline doesn't get a significant cash infusion soon.

Part of that infusion may have occurred Monday, when Delta sold feeder carrier Atlantic Southeast Airlines Inc. to SkyWest Inc. for $425 million in cash.

Delta said the proceeds will be used for general corporate purposes and to pay down $100 million of debt under its loan agreement with GE Commercial Finance and other lenders.

The sale, subject to regulatory review, is expected to close in September.

$14.1 Billion in Debt

In a Securities and Exchange Commission quarterly report filed Monday, Delta said it faces "a significant amount of indebtedness and other obligations," with $14.1 billion in outstanding debt and capital leases.

News got worse Tuesday, when Standard & Poor's Register of Corporations dropped Delta from its S&P 500 and S&P 100 indexes, and lowered the credit rating on Delta due to "a very high risk of near-term bankruptcy."

According to Standard & Poor's, even the Monday sale of Atlantic Southeast won't ease Delta's cash crunch. Despite the sale, "the company expects its cash reserves 'will decline substantially during the remainder of 2005.' Accordingly, and despite other efforts to raise funds, the company acknowledges 'significant uncertainty' as to whether it will be able to 'maintain adequate liquidity,'" according to Standard and Poor's.

Even if Delta is able to address near-term liquidity concerns, it still needs legislative relief from substantial upcoming pension funding requirements, Standard & Poor's reported. Delta will likely have to decide whether it can avoid bankruptcy by Oct. 17. That's when amendments to the federal bankruptcy code implement less favorable terms for debtors, S&P said.

"Unfortunately, new pension legislation may not be passed until November or December, leaving Delta with a difficult decision even if it does meet the other conditions to remain solvent," S&P said.

As the economic trends continue to work against Delta, the question has arisen around the area: What if Delta is forced to file for bankruptcy protection? What are the implications for Delta, CVG and the Northern Kentucky region?

The Associated Press contributed to this story; a series of reports on the questions raised in the story's final sentence accompanied this main story. This article was published August 21, 2005, in The Sunday Challenger, serving Northern Kentucky, and on ChallengerNKY.com.