Delta Air Lines (NYSE:DAL) seems destined to be the next in line among the old-line legacy air carriers to file for Chapter 11 protection under the U.S. Bankruptcy Code, joining United Airlines parent UAL (OTC BB: UALAQ) and US Airways (OTC BB: UAIRQ). Should it do so, more than 40% of all of the commercial passenger air traffic will be operating under the protection of various and sundry bankruptcy courts. Unbelievable.
Less than a month ago, my colleague, Motley Fool Income Investor editor Mathew Emmert, noted just how much trouble the airlines were in, but that was prior to the Chapter 22 (Chapter 11 twice) filing for US Airways. As he noted, it's not as though the more stable legacy carriers -- Northwest (NASDAQ:NWAC), American Airlines (NYSE:AMR), or Continental Airlines (NYSE:CAL) -- are in great shape either. This is a business that has put itself over a barrel. With the overcapacity, the powerful unions, massive fuel costs, and spiking security burdens, not one of these carriers is out of the woods. Continental may be the most secure of the lot -- a concept that would have caused industry analysts to titter only a few years ago. Continental has come a long way, but the others have slipped even more in the opposite direction.
Delta looks like it is the next in line. The company is desperately seeking the $2.7 billion in cost savings to stave off bankruptcy. It hopes to squeeze some $1 billion of this from its pilots union. Some of it the company hopes to generate from restructuring its massive $21 billion debt load under a proposed exchange offer. Delta has also announced that it would allow pilots who have accepted early retirement to continue to fly for the company on temporary contracts. This is a temporary solution -- the pilot's union may quit allowing pilots to do so when the current agreement ends in January 2006.
Even the process of getting pilots to retire early has caused cash problems at Delta. Pilots have elected in droves to accept a single, flat payment that averages $300,000, or about 50% of what they would get over the life of the pension. The reduction in vested benefits for the company is a good thing -- the massive, immediate cash drain in Delta's pension is very, very bad, as it puts the pension deeply into underfunded status.
The trouble for Delta and the other carriers is that the same court facility -- bankruptcy -- that allows them to get second and third chances is the same thing that keeps too much capacity, too many companies chasing too few dollars on the market. Eventually, one or more carriers is going to have to disappear, or the pattern of self-destruction will certainly continue. It probably won't be Delta -- for as bad as it is there, it's better than the struggling UAL, but it's going to have to be someone.
Bill Mann does not own any company mentioned in this story.
