US majors are muttering threats of bankruptcy filings, with one touting the possibility of filing for the second time
US Airways said it could become a repeat filer, while Delta Air Lines is no longer in denial, accepting that bankruptcy is "possible". Delta has said repeatedly that it would fight to avoid a filing and has been cautious in the words it uses in discussing the subject.
Asked about it at Delta's annual shareholder meeting in April, chief executive Gerald Grinstein said only that bankruptcy would be undesirable. But in a Securities and Exchange Commission filing in May, Delta said: "If we cannot achieve a competitive cost structure, regain sustained profitability, and access the capital markets on acceptable terms, we will need to pursue alternative courses of action...including the possibility of seeking to restructure our costs under Chapter 11."
Delta was the last major carrier to sign a pilot contract before 11 September and since then has been unable to extract significant savings from its only union. Management has made a 30% pay-cut proposal, but the pilots are only prepared to accept 13%, made up of 9% in wage cuts and 4.5% in forgone pay raises. They have balked at getting to the bargaining table.
The wage increase was paid, increasing annual costs by $85 million, and Delta also began to recall 1,060 pilots it laid off after the 11 September attacks because passenger traffic reached levels set by an arbitrator. Most of them will have to take refresher training, at an unspecified cost. Delta's shares have fallen 60% this year and since late April have been at their lowest since at least 1980, according to Bloomberg data.
The first-quarter loss at Delta was $388 million, a slight improvement over $490 million a year ago. That nevertheless marks a sharp reverse in fortunes for a carrier that just two years ago had some of the lowest costs in the industry. After the bankruptcies at United Airlines and US Airways and the near bankruptcy of American Airlines, Delta now finds itself showing some of the highest costs among the restructured majors.
Delta may have decided to emulate American's journey to the door of the bankruptcy court, a door American officials insist they were prepared to open if $1.8 billion in union concessions were not forthcoming. The gamble paid off - for March 2004 American earned $42 million for the March quarter and generated about $370 million in cash, chief financial officer James Beer said in mid-May. American's quarterly net loss was 85% below that of a year ago, as 16% lower operating costs kicked in.
Overall, despite profits at America West, American and Southwest, the majors showed a collective $879 million operating loss in the quarter. These results came on the back of revenues that rose consistently for all carriers. United says its efforts to restructure its business by lowering costs, increasing productivity and boosting revenue are paying off, with its progress during the first-quarter of an operating loss of $211 million a strong improvement over the $602 million lost a year ago.
But, as they say, it ain't looking up. Towards the end of the first quarter, some took hope from a few bright signs on the revenue front, but that comes from easy comparisons.
JP Morgan's Jamie Baker says: "Tough second-half comparisons are approaching, and our long-standing thesis has been that revenue trends would exhibit recovery by spring time. At the industry level, we've witnessed no such evidence yet." However, the discounters are, as usual, doing well.
UBS analyst Sam Buttrick says that unit revenues will probably have peaked by the end of the first quarter, "with results flattening out in May and June and turning somewhat negative over the summer". Like others, he sees Delta's restructuring efforts as a highlight to watch for the coming quarter, as well as a possible US Airways return to bankruptcy court.
All in all, it is not anticipated to be a season to savour.
Source: Airline Business
