Delta Cuts to Run

Desperate times call for desperate measures. In Delta's (NYSE: DAL  ) case, that's now, according to CEO Gerald Grinstein. In a memo to employees yesterday, Grinstein announced a 10% pay cut for employees other than its pilots. Employees will also share more of the costs related to health care.

Grinstein positioned the cuts as critical to avoiding a bankruptcy filing. Yet a report this morning in the online edition of USA Today quotes airline consultant Jon Ash as wondering why Delta doesn't simply declare bankruptcy now. Indeed, I wonder the same thing. Ash told the paper that the airline needs court protection to clean up its balance sheet and reduce its liabilities.

That may be the understatement of the year. Delta's most recent balance sheet as reported at Yahoo! Finance shows more than $21 billion in long-term debt and liabilities. Its quarterly interest payments equal nearly $200 million while cash on hand -- currently $2.2 billion -- continues to dwindle. No wonder published reports say Delta is spending $3 million in cash per day.

In his memo, Grinstein says that the pay cut, along with job cuts and other cost-saving measures outlined here, will add $1 billion to the $2.3 billion in savings Delta has said it will achieve by the end of the year. The company is targeting $1 billion more in concessions from its pilots, and $5 billion total in annual reductions by 2006.

Although impressive progress has been made, Delta is still $700 million short -- and that's assuming the pilots agree to givebacks. Sure, there could be some obvious fat waiting to be trimmed playing possum somewhere in Delta's business model. But $700 million worth? That's one fat possum.

So, let's just be honest, OK, Jerry? I admire your fight and your willingness to give up what appears to be $125,000 of your $500,000 salary for 2004, but the $3 billion gap you hope to close in the next two years should be traversed through a court-supervised restructuring. Please get on with it.

For more Foolish coverage of Delta and the airline industry:

  • US Airways (OTC BB: UAIRQ) could join Pan-Am and Braniff as the most recent airline to shut off its engines for good.
  • If Delta joins rapidly descendingUAL's (OTC BB: UALAQ) United and US Airways in bankruptcy, then roughly 40% of the nation's air traffic will be operated by carriers in hock.
  • If Delta doesn't address its identity crisis, it could crater any day.

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Fool contributor Tim Beyers owns none of the stocks mentioned, but he has family members who are retired from United Airlines. You can view Tim's Fool profile here.


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