Delta's Aborted Crash Landing

If you've ever been in an airplane that has to abort a landing, you know that it is a completely hair-raising, disorienting experience. But for Delta Airlines (NYSE:DAL) shareholders, there's probably no sweeter feeling on earth at the moment. Two weeks ago, Delta's debt-mired descent had all of the makings of a horrific crash. Today, after some pilot's union concessions, cash infusions, and a debt restructuring or two, the troubled airline has at a minimum given itself increased hope of survival without having to declare bankruptcy.

Since mid-October Delta shares have more than doubled, from a low of $2.75 on Oct. 20 to a current share price just shy of $6 a stub. Delta's debt has similarly rallied as the chance of near-term default has lessened considerably.

So, were investors who bought at the absolute lows smart or simply lucky? There are probably as many answers to that question as there are holders of Delta stock. I will say this: As a group they are not risk-averse. A great many things had to fall into place for Delta to be able to avoid bankruptcy. It was prepared to file for Chapter 11 bankruptcy as late as last Wednesday. In doing so it would be joining a number of its compatriot airlines, including United, US Airways, and now ATA.

So it came as further good news last night when Delta announced that it had achieved some success in getting holders of its short-term debt to exchange their unsecured debt for secured debt with a longer maturity. As of the announcement, Delta's creditors have tendered $252 million of its debt, which means that the company has met a key threshold with new lenders, including General Electric (NYSE:GE) and American Express (NYSE:AXP). It also satisfies a condition of the package of concessions that pilot's union leaders had negotiated with the company in exchange for an agreement to present to members a package that would save the company an estimated $1 billion per year.

Delta is desperately seeking to improve its access to cash as high oil prices and the winter season approach. Generally, winter is a time when the airlines burn more cash, and that problem is certain to be exacerbated should fuel costs remain high. The situation remains grim for several airlines as rugged price competition and poor cost structures continue to grind up competitors.

A great deal more has to happen for Delta to be out of the woods. Continued drops in fuel prices would be a boon, though the airline is unlikely to be counting on such an outcome to rescue it. For the time being, expect Delta to continue to press debt holders to tender their shares at terms that will keep the airline out of bankruptcy. This is by no means assured, though Delta certainly has given itself much more hope of a positive outcome than it had just two short weeks ago.

Bill Mann has beneficial interest in some Delta debt issues. For some deep value ideas, consider a trial subscription to Philip Durell's Inside Value newsletter, a Motley Fool production. Seriously, you'll find ideas in places you've never thought of.