Delta

[Kristie]

well, no news on Delta yet.. but we're expecting to hear something I guess by the end of the month...

I just don't understand why the company won't take the 705 million that the pilots have offered.. at least it's a start in the process! that in itself is so close to the billion they need.. I just don't get it... not that only pilot concessions will help at this point...

I guess we'll just have to see what happens!

[roz]

There are a couple of issues. First is the pension. It is so underfunded that Delta needs to contribute over $700 million a year for the next five years. Plus, the fact that retiring pilots are allowed lump sum withdrawals, is causing a cash drain. They had $117 million in lump sum withdrawals in the second quarter and $14 million in the third quarter. They expect a larger charge in the fourth quarter.

The cash is down below bankruptcy triggers. They are entering the winter months with high fuel costs, bad weather that causes cancellations and expenses, while they are low on cash.

Fuel costs are not hedged because, like Pan Am when it was feeling the need to raise cash, Delta has been selling assets. So they sold the hedges for cash that was used to pay current bills. You don't sell assets for current operating expenses and survive. They will have over $900 million more in fuel expenses in 2004 than they did in 2003.
You can see this in their breakeven load factor for the 3rd quarter jumped from 78.5% in 2003 to 86.88% in 2004. The load factors are 77.66%--so it's not even close anymore. The CASM is about 3 cents higher than it needs to be.

On Nov 1st, the relationship with ACA--Indy ends. The contract states that Delta has to take over the lease payments for the Dorniers that will be parked. In bankruptcy they would not pay--Indy would be saddled with the payments--over $100 million twice a year.

Delta has a lot of debt and massive debt payments coming due soon. They tried to restructure and no one was interested. They are trying again to exchange over $600 million in debt--to reduce the principal payments over the next two years in exchange for slightly higher interest rates. Bond holders are nervous, though. The new notes would be secured beyond the existing collateral with remaining unencumbered aircraft, flight simulators and training equipment valued at $400 million. The offer is conditioned upon $1 billion in concessions by the pilots and ratified by the pilot group prior to November 18th.

Now, even with all of that, they STILL have a liquidity problem going forward. They still need to find $800 million in new financing in 2005 AND defer an additional $325 million in debt that is due then. They are asking the holders of these bonds to defer payment of the principal when due in 2005 till 2007 in exchange for stock in the company. And their business plan is based on oil at $40 per barrel in 2005 and $35 in 2006. If it remains at $50 per barrel, that will add $600 million in expenses in 2005 and $900 million in 2006. They have NO hedges going forward.

[roz]

They got some of the bondholders to defer payments--all contingent on concessions of $1 B by the pilots ratified prior to Nov 18th:

http://biz.yahoo.com/prnews/041025/clm093_1.html

And they got some financing:

http://biz.yahoo.com/ap/041025/delta_4.html

AMEX gets super-priority in any bankruptcy proceedings, and it is contingent on the pilots ratifiying concessions of $1 B.

[Kristie]

so it again, all comes down to the pilots....oh brother! why does this feel like a set up? hahaha

[roz]

The part that is disturbing is that $500MM of the AEX money is really an advance on the next three years of Sky Miles payments. Once again, a company is borrowing against future assets for current expenses. It's very dangerous. Plus, the SEC filing doesn't specifiy what the collateral that is in super-priority position in the event of bankruptcy.

[Kristie]

Doug told me last night that DAL gave money to Skywest last quarter (like 200mil or so?) to make Skywest look as if they were making a profit...I was a little perturbed at that.. Why would they do that? it's not so much the amount of money, but the fact that it seems they're mismanaging money on purpose just to get concessions...

As Doug and I were talking, it seemed that everything is contingent on concessions, yet there's a lot more expenses than just pilot pay that goes into the financial background of the company.. why don't they also make it contingent on other stuff like fuel costs, marketing plan, money management issues, what happens with Song and stuff like that?! pilot pay is always used as a scapegoat issue and that's just not right....

[roz]

I didn't see anything about that in the 10Q. I'll look more closely. And I'll check the first quarter and annual report as well. It'll be tonight though because I'm swamped at work today!

[Kristie]

Where do you find all this info Roz? I'd like to check it out too, find out what's "really" going on!

and what's a 10Q?

[roz]

Ok, I've read all the 10K's and 8K's of both Delta and SkyWest. I can't find anything to support that. The only thing I could find is that they renegotiated the payment to SkyWest from a contract carrier (they pay you $X per flight regardless of the number of passengers) to a prorated flying arrangement (they pay you a prorated portion of the fares collected).

Delta now reports their contract carrier revenues and expenses separately. I don't see a substantial difference over the periods from last year given the increased aircraft.

There is the $300MM projected expense for the Dorniers from ACA over the next 13 years--but if they declare Chapter 11 that goes away. They have the same arrangement with SkyWest-and Chautauqua-if they break the contracts, they assume the leases on the SkyWest or Chautauqua jets.

So, if you give me more concrete information I can dig further.

By the way this is all public record. They have to file this stuff with the SEC.

Again, though, the SkyMiles deal really disturbs me. They are just getting an advance of $500MM from AEX. So they are using their future cash flow now. That leaves them short by that much going forward. In other words, I have my AEX card. I get reward points on it for purchases. I can redeem those reward points for Delta SkyMiles (or Hertz rentals, or hotel stays, or a lot of other things). When I do, AEX has to purchase the miles from Delta. AEX knows their redemption rate. So they know how much they can expect to spend in the next few years. So they advance the money, but now it will be collateralized since it is an advance. And the collateral is in a super-priority state in the event of bankruptcy.

So why are the markets going crazy thinking this is a great thing?????

[roz]

Well there is a TA. We will wait to see what it is:

This is Chris Renkel, MEC Communications Committee Chairman on Wednesday, October 27, at 7:40 p.m. with a special update.


Late this afternoon, your Negotiating Committee reached a tentative agreement with Delta management on a pilot costs savings package.



The MEC will review this document tonight. We will not release any details until the MEC has completed its deliberations.



That is all.

And:

http://www.marketwatch.com/news/yhoo/sto...10748CA0BAA8%7D