[Article] Delta Air Lines, Northwest Airlines file Chapter 11

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Two US airlines file for bankruptcy
From:Reuters
Wednesday, 14 September, 2005
By Patrick Fitzgibbons

NEW YORK (Reuters) - Delta Air Lines Inc. and Northwest Airlines, the third- and fourth-largest U.S. air carriers, both declared bankruptcy on Wednesday as the industry's struggle with soaring oil prices and low-cost competition came to a dramatic head.

With the filings, both made in U.S. bankruptcy court in the Southern District of New York, four of the seven largest airlines in the United States are now operating under Chapter 11 federal bankruptcy protection from their creditors.

Both airlines would likely use bankruptcy to slash labour and pension costs, following in the footsteps of No. 2 U.S. carrier United Airlines, the main unit of UAL Corp..

The bankruptcies could put added pressure on other carriers including industry leader AMR Corp., parent of American Airlines, by putting them at a competitive disadvantage as their bankrupt rivals shed costs and ditch pensions, analysts said.

On the other hand, other airlines could benefit if Delta and others cut back on domestic routes, getting rid of overcapacity that has made the U.S. airline sector the most troubled worldwide.

"The action we have taken is a necessary and responsible step to preserve Delta's value for our creditors, customers, employees, business partners and other stakeholders," said Delta Chief Executive Gerald Grinstein in a release. "Delta is open for business as usual and will continue normal operations throughout the reorganization process."

The sector's woes went from bad to worse this month as refinery outages caused by Hurricane Katrina sent jet fuel prices spiking. U.S. airlines are expected to post some $10 billion in losses this year.

Atlanta-based Delta's problems were compounded by a crushing debt load of more than $20 billion and one of the industry's biggest underfunded pension burdens.

Founded in 1928, Delta became a top international player by taking over many routes from defunct Pan Am in 1991. It has faced an uphill battle to recovery after getting hammered by the attacks of September 11, 2001, and the slowdown in flying that followed.

"Delta is overleveraged and they weren't going to stay out of bankruptcy, no way," said Ray Neidl, an analyst at Calyon Securities.

Labour COSTS

Northwest's woes are focussed on high labour costs, which it is trying to slash by $1.1 billion.

Analysts said Northwest, which hired replacement workers to substitute for mechanics and cleaners who struck last month, could be using bankruptcy to get concessions that unions have been reluctant to grant at the bargaining table.

"Northwest must significantly lower its costs to compete with other carriers. Many of these are legacy carriers that have already used the bankruptcy process," said Doug Steenland, Northwest president and chief executive. "We had developed a plan to restructure Northwest outside of Chapter 11 and have been implementing that plan ...

"Unfortunately, in addition to an uncompetitive cost structure, our efforts have been overtaken by skyrocketing fuel costs."

Credit rating firm Standard & Poor's said on Wednesday that Northwest's failure to make $42 million in payments due on Tuesday made a bankruptcy filing likely.

Adding to pressure on the Eagan, Minnesota-based carrier, Northwest would face a lien against its assets if it missed a $65 million pension payment due on Thursday, S&P said -- unless the airline sought court protection.

United and US Airways Group Inc. are both already operating in bankruptcy, though both are hoping to emerge soon.

Wednesday's additional bankruptcy filings could pave the way for additional mergers and acquisitions in the sector, Merrill Lynch analyst Michael Linenberg said in a report.

On Wednesday, Delta shares closed down 7 cents, or 9 percent, at 71 cents on the New York Stock Exchange. Northwest shares, which were hammered Tuesday on expectation of a bankruptcy filing, closed up 30 cents, or 19.1 percent, to $1.87 in busy trading on Nasdaq.

Northwest's stock has plunged 86 percent so far this year, while Delta has lost 90 percent of its value.

On the debt markets, Northwest's 10 percent notes due in 2009 rose to 26 cents on the dollar, about 2-1/2 cents higher on the day, after tumbling more than 9 cents on Tuesday, according to MarketAxess.

Delta's 8.3 percent bonds due 2029 rose to 16 cents on the dollar, about 0.5 cent higher on the day, according to MarketAxess. They are still about 3/4-cent lower month-to-date.

(Additional reporting by Christian Plumb, Jui Chakravorty and Dena Aubin)