Delta Air Lines, locked since summer in a struggle to stave off bankruptcy, has won pilot union agreement for $1 billion in annual pay cuts up to 2009.
The pay cuts are part of Delta chief executive Gerry Grinstein's larger strategic plan. This includes 6,500 more layoffs, a de-hubbing at Dallas/Fort Worth and an increase in service at its hubs in Atlanta, Cincinnati and Salt Lake City. There will also be an increase in flights on its low-fares Song unit. Non-union employees will see pay cuts of 10% next year.
The deal with pilots, coming after sharp wage cuts at United and American Airlines, in effect ends the era of lavish pilot pay rates and multi-million dollar careers, but does not bring definitive status or closure to Delta's long-running woes. As Air Line Pilots Association local chairman John Malone says, the agreement "bought Delta time to continue restructuring outside the courts. It is now up to management to successfully execute a viable business plan."
However, Delta officials say that avoiding the bankruptcy courts is far from assured. First it must convince the holders of its $20.6 billion in debt to restructure terms while finding further cost cuts to cover the rising price of fuel. In the short term, the approval will help Delta raise $1 billion from General Electric and American Express, which had each made pledges of $500 million in support contingent on the pilot vote.
The airline must also persuade bondholders to exchange $252 million of debt for new securities, which is made difficult because the issue of new shares to award the pilots dilutes the shares now outstanding. Delta is also in talks to win a further $100 million in annual concessions from vendors, suppliers and aircraft lessors.
Standard & Poor's analyst Phil Baggaley says Delta "increasingly appears likely to give up on its original efforts to reduce its $20 billion debt burden materially, settling instead for near-term debt deferrals" and other steps. The carrier had $1.45 billion of cash at the end of the third quarter and by some estimates is burning $3 million daily.
Delta gets some relief almost immediately as the five-year pilot contract calls for a 32.5% pay cut, effective from December. Under the contract, the carrier saves about $147,000 per pilot a year. The annual pay range would be between $34,020 for junior pilots and $194,160 for captains flying its largest aircraft, the long-range Boeing 777s. Delta pilots now earn between $50,400 and $287,652 annually.
Delta had set the pilot pay ceiling with its 2001 contract that gave the highest US rates, but the carrier will now have pay rates about the same as at United, although still above those of American. Additionally, the deal clears Delta's codeshare regionals to fly more 70-seat jets. In return, the pilots get options to buy up to 15% of Delta.
JP Morgan analyst Jamie Baker says this "last-minute bankruptcy sidestep is best viewed as a stay of execution, affording Delta at least six months more time to put its house in order". Baker says: "Delta should at a minimum limp into the summer months," but its longer-term survival rests on such uncontrollables as lower oil prices or dramatic changes in the industry such as a US Airways liquidation.
Source: Airline Business
