Twin Tailspins for the Airline Industry

Should Delta file Chapter 11, it will share that fate with US Airways, which recently filed for the second time and soon will suffer the ignominy o...
Ed ZwirnSeptember 17, 2004

Days after US Airways, the country’s seventh-largest airline, filed for Chapter 11 bankruptcy protection, the country’s third-largest carrier was prompted by its auditor to issue a statement warning that it may soon do the same.

Delta Air Lines announced that its auditors, Deloitte & Touche, had questioned its “ability to continue as a going concern.” Last week the company revealed a restructuring plan that would cut up to 7,000 jobs over the next 18 months.

This week’s announcement, and an 8-K filing that also revised Delta’s 2003 annual report, acknowledged that the airline’s operations had been hindered by labor problems, shrinking liquidity, and narrower margins due to high fuel prices. “Our unencumbered assets are limited, our credit ratings have been substantially lowered and our cost structure is materially higher than that of our competitors,” Delta reported in its filing.

Delta also painted a bleak picture of the sector as a whole. “Since the terrorist attacks of September 11, 2001, the airline industry has experienced fundamental and lasting changes, including substantial revenue declines and cost increases, which have resulted in industry-wide liquidity issues,” the company stated. Although global economic conditions have improved since then, the industry has continued to experience “a reduction in high-yield business travel and increased price sensitivity in customers’ purchasing behavior.” Delta added that aircraft fuel prices are near their historic highs and that “we expect all of these conditions will continue.”

Should Delta file Chapter 11, it will share that fate with US Airways — which filed for the second time Sunday and will suffer the ignominy of being delisted from Nasdaq on September 22 — as well as number-two air carrier United Airlines and several smaller airlines.

Delta — which has about $20 billion of debt outstanding, according to the Associated Press — also noted that access to and costs of borrowing on credit markets have also increased since the September 11 attacks. Moody’s Investors Service now gives a rating of Caa3 to the company’s senior unsecured long-term debt; Standard & Poor’s, which gives Delta a rating of CCC-, has lowered that rating four times this year alone.

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