Sometimes the financial markets really make you wonder whether people are paying attention. They also can make you wonder whether or not some of Wall Street's MBAs came included with a box of caramel-coated popcorn.
Take, for instance, the action in Delta Air Lines (NYSE:DAL) this week. The stock fell about 12% on Thursday when the market noticed that Delta's 10-K report included warnings of steep losses for 2005, a major liquidity crunch, and the possibility of a bankruptcy declaration.
So, I ask, what's new here?
Since Delta teetered on the brink of bankruptcy in the fall of 2004, have things really changed? In that time, has the price of oil dropped significantly? Has passenger traffic meaningfully increased? Has profitability increased?
I didn't think so.
In some respects, reading the Delta 10-K is a sobering view of a company that seems doomed under present management. Whether it's the suggestion that the company expected lower fuel prices for 2005 (one might ask "why?"), or the justification of recent rate cuts as stimulating future air traffic, none of it gives me much confidence today.
Given that Delta doesn't really have much left in the way of unburdened assets, raising more money isn't going to be easy. While the company is expected to attempt to sell its Comair and Atlantic Southeast subsidiaries, everybody knows that (which should hurt the price), and there aren't too many carriers with a clean enough balance sheet to step up to buy.
What's more, airline reorganizations can take a long time to resolve (just ask UAL (OTC BB: UALAQ) or U.S. Airways (OTC BB: UAIRQ)). Delta will need to go into bankruptcy with a fair bit of cash on hand if it is to avoid dissolution.
Whether Delta can scrape by this newest brush with bankruptcy, it's hard to see the airline industry returning to the good old days. The fact is, the success of Southwest Airlines (NYSE:LUV) has fundamentally changed the nature of air travel in this country -- proving that you can operate what amounts to flying cattle cars if the fare price is low enough.
Since then, other airlines have stripped down their operations to the point where they seem to resemble Southwest's plan, but without the profitability. Here's the trick -- Southwest does it really, really well -- and its competitors don't. So much so that I actually find Southwest's comfort and service levels to be superior to most major carriers these days.
Nevertheless, despite high fuel costs and generally tepid traffic, there were, and are, analysts who actually still recommend buying Delta. While I don't dispute that even the merest hint of recovery could move this stock upward in a hurry, the risk/reward is startlingly bad. Given that Delta issued options for about 80 million new shares as part of its attempt to gain concessions from employees and vendors, a recovery in Delta stock and an exercise of those options could dilute existing shareholders by something on the order of 60%.
Taking a gamble on some of the Delta bonds (like colleague Bill Mann did) might be an option for intrepid souls with a gambler's stomach, but the stock is strictly on my no-fly list for now.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned.
