Delta's Wage War

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Delta Air Lines' (NYSE: DAL) first-quarter numbers were predictably bad, but not so bad as this accompanying warning from CEO Gerald Grinstein: "Continued losses of this magnitude are unsustainable. Delta must regain sustained profitability so we can compete effectively."

If you think that sounds dire, get a load of this from the CEO of US Airways (Nasdaq: UAIR): "Southwest (NYSE: LUV) is coming to Philadelphia in May... and they're coming for one reason: They're coming to kill us."

If not quite so gloomy as that, Delta's conference call today nonetheless drove home a number of somber points: (1) Debt downgrades have made Delta's cost of borrowing prohibitive; (2) Pricing power belongs to the low-cost carriers; and (3) Delta's main obstacle is that it pays more for pilots than anyone else does.

As for debt, Delta has almost as much as it has revenue. That may not compare favorably with low-cost carrier AirTran (NYSE: AAI), where debt sits at 27% of revenue, but for already profitable JetBlue (Nasdaq: JBLU), total debt exceeds revenue. So, while no small concern, debt is clearly not the heart of the problem.

The same can't be said for wages. At 48.9% of revenue, Delta's wage costs are simply over the top. Hardly lean and mean itself, AMR (NYSE: AMR), parent of American Airlines, reported wage costs of 40.3% (excluding affiliate revenue) for its latest quarter. JetBlue's sit at an impressive 27.7%. Little wonder analysts expect Delta to lose $5.63 this year and $0.79 next year.

With so much low-cost competition, and with British tycoon Richard Branson poised to enter the domestic low-cost airline business, it's hard to find a compelling reason to buy Delta. At least not until it is clear it can get wage costs under control.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned, but wonders why Delta is an air line when others are airlines.

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