Delta plans to tap into cash reserves, shares sink

Mon Aug 9, 2004
By Meredith Grossman Dubner

CHICAGO, Aug 9 (Reuters) - Delta Air Lines, racing to slash costs to avoid bankruptcy, on Monday said lower yields and higher fuel prices have eaten into 2004 cash flow, prompting it to turn to cash reserves to pay certain expenses.

Shares of the No. 3 U.S. airline sank more than 5 percent to their lowest level in more than two decades.

The Atlanta-based carrier said it expects its cash balance to decline during the remainder of 2004 at a level consistent with the drop during the first half of the year.

Delta had $2.0 billion in cash at the end of the second quarter, down from $2.7 billion at the end of 2003.

Delta, which has said it could be forced to file for bankruptcy if it cannot secure steep cost reductions soon, has not outlined which expenses will be paid out of its cash reserves, a Delta spokeswoman said.

Analysts have said the company could face a liquidity crunch as soon as this fall or winter.

"We are intensively engaged in an effort to identify and obtain cost reductions from our key stakeholders, and to implement new strategic business initiatives in order to effect a successful out-of-court restructuring, but there can be no assurance this effort will succeed," Delta said in a quarterly filing with the U.S. Securities and Exchange Commission.

Delta also said it could not forecast the outcome of discussions with its pilots union, from which it is seeking huge concessions.

The carrier said it does not expect to have access to capital markets for new borrowing unless it is able to cut costs dramatically.

Several credit rating agencies have downgraded Delta recently. While the carrier said the downgrades do not accelerate its debt obligations, they do harm its ability to borrow going forward.

Delta has scheduled debt maturities of $230 million for the second half of 2004 and $1.2 billion for 2005, it said.

It projected fuel costs would be $680 million higher this year than in 2003.

URGENCY INTENSIFIES

Merrill Lynch analyst Michael Linenberg said in a recent research note that the surge in oil prices lends an urgency to pilot talks. He predicted Delta could see $50 million to $75 million in added fuel expenses this quarter.

"Delta's unrestricted cash position at the end of the June quarter of $2 billion does not give it much room to maneuver," Linenberg wrote. "If Delta and its pilots aren't able to make meaningful progress as we move into the fall, the company will likely have no alternative but to file for bankruptcy," Linenberg said.

Leaders of the pilots union are meeting this week to hear updates from their financial experts, legal advisers and negotiating committee.

The union has offered a concession package worth $655 million to $705 million, but the carrier last week said it needs $1 billion a year from pilots and also proposed changes to pilot pensions.

Pilots have said they cannot respond to management's proposal until the company addresses specifics on economic returns and outlines a restructuring plan that includes other stakeholders.

Early pilot retirements could also weigh on finances, Delta said in the filing.

A greater number of pilots have opted for early retirement recently due, in part, to concerns about pension payments if the airline files for bankruptcy. About 2,000 of Delta's 6,900 pilots are currently over age 50 and eligible to retire, the airline said.

Delta said it expects total 2004 pension contributions to qualified plans to be about $460 million, $410 million of which was contributed during the first half of the year.

It forecast additional non-cash charges related to its pilot pension plan in the third and fourth quarters, but predicted the third-quarter charge would not be material.

Delta shares fell 22 cents, or 5.4 percent, to $3.89 on the New York Stock Exchange.

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