Delta, pilots deal helps avoid bankruptcy; shares increase

Lynne Marek

Thursday, Oct. 28, 2004 | 9:39 a.m.

Delta Air Lines Inc., the third-largest U.S. carrier, may avert a bankruptcy filing after winning $1 billion in wage, pension and other concessions from its pilots union. The shares surged as much as 27 percent.

The union's top council approved the tentative five-year contract and gave members until Nov. 11 to vote, the union said in a message. The proposal includes cutting pilots' pay 32.5 percent, freezing the crews' current defined benefit pension plan and replacing it with a defined contribution plan.

Delta's Air Line Pilots Association and company negotiators reached the agreement last night. The airline sought pay cuts to avoid a bankruptcy court filing as high fuel costs and price competition widened losses. Delta is also seeking to trim a $20 billion debt load by offering bondholders owning $2.6 billion of debt an option to swap for as much as $680 million in new notes.

"Assuming concessions are approved, Delta will have taken a critical step toward averting Chapter 11," Morgan Stanley analyst William Greene said in a note to clients. "As management has indicated, successful completion of (the) debt exchange offer is also key."

Delta shares rose 70 cents to $5.64 in New York Stock Exchange composite trading at 10:07 a.m. after touching $6.24, the highest price since Aug. 21. The stock had declined 58 percent this year through Wednesday.

Delta's 8.3 percent bond maturing in 2029 rose about 4.5 cents on the dollar to 37.5 cents, a trader said. The bond, the company's largest with almost $1 billion outstanding, now yields more than 22 percent, according to Bloomberg data.

Delta has sought concessions from the pilots since April 2003 and this year asked pilots to take a 35 percent pay cut plus work changes to make the airline more efficient. A union's top council typically reviews a tentative agreement before deciding whether to send it to members for a vote, a process that can take up to a month and can be accelerated.

The airline had a third-quarter loss of $646 million because of high jet-fuel costs, a drop in U.S. airfares and flight disruptions caused by Florida hurricanes. The company's cash dropped to $1.77 billion at the end of the quarter, down from $2.3 billion at the end of the second quarter.

Delta has said it needs the pilot cost reductions to compete with expanding discount carriers, including JetBlue Airways Corp., on the U.S. East Coast and larger rivals that won concessions from pilots last year. Lower costs have allowed the competitors to cut prices, forcing Delta to match. Delta's third-quarter average fares were about 5 percent lower than for the period last year.

After Delta asked the pilots for the concessions, the union in July offered as much as $705 million, taking a 23 percent pay cut. That was the union's most recent public response.

The union and company have been in negotiations daily during the past week, sometimes talking through the night to reach agreement. Delta's shares increased 52 percent this week through yesterday as the company and pilots negotiated.

"Both sides should be commended," said Steven Gidumal, a portfolio manager at Philadelphia-based Virtus Capital Management LLC, which owns Delta bonds. "It proves obvious rational outcomes can prevail in airline restructurings."

Three U.S. airlines have sought bankruptcy court protection in the industry's unprofitable years since the Sept. 11 attacks. ATA Holdings Corp., the biggest carrier at Chicago's Midway Airport, filed for Chapter 11 two days ago. United Airlines parent UAL Corp. of Chicago has been under court supervision for almost two years. US Airways Group Inc. in Arlington, Va., filed its second bankruptcy petition in two years on Sept. 12.

Delta pilots became the highest paid in the industry last year after larger rivals American Airlines, a unit of AMR Corp., and United Airlines secured concessions from their pilots.

Pilots at Delta receive annual salaries ranging from $50,000 for new hires to $250,000 for the most senior, the union said. Pay at United following the concessions last year ranges from about $60,000 to $204,000, according to the union for pilots at the Chicago-based airline.

Delta said last month that it would pare as many as 7,000 jobs and cut pay for most workers, excluding the pilots, by 10 percent as part of its effort to achieve $5 billion in annual savings by 2006. Delta's pilots union, which has 7,500 members, is the only major unionized work group at the company.

Throughout the negotiations the pilots have sought stock in exchange for the givebacks and a voting seat on Delta's board. The union has also demanded that creditors, vendors, plane lessors and suppliers provide help to trim costs.

Delta three days ago got $600 million in new financing from American Express Co., which said it would prepay $500 million to buy the airline's frequent-flier miles for credit-card customers and provide a $100 million loan, subject to some conditions.

Delta has about $20 billion in outstanding debt, including aircraft leases, according to Standard & Poor's. The carrier also said this week that it got help in delaying debt payments with bondholders for 7.7 percent notes due in 2005, worth about $135 million, agreeing to exchange those bonds for 8 percent senior notes due in 2007.

Delta's exchange offer to bondholders would let the airline delay debt payments and cut $64 million in interest expense. The early deadline was Oct. 26 and the final deadline is Nov. 18.

Delta's Estes declined to comment on results of the debt exchange at this point.