Capital Markets

Airline Financing Encounters Turbulence

United, Delta, and Northwest are still flying, just not flying high.
Stephen TaubNovember 8, 2004

The financially infirm airline industry is trying desperately to stay aloft, searching for creative ways to secure financing and cut costs.

Late last week United Airlines told its unions that the company needs to reduce costs by an additional $2 billion, according to Reuters, so it can secure sufficient financing to emerge from nearly two years of bankruptcy. Glenn Tilton, chief executive officer of parent company UAL Corp., reportedly blamed the need for additional cost cuts on record jet-fuel prices and on competition from low-fare airlines that don’t offer traditional pension plans.

In a recorded message to employees, Tilton announced a three-pronged plan to meet this goal: one-third of the savings would come from labor, one-third from replacing pensions with cheaper plans, and one-third from non-labor cost cuts.

The airline would pare labor costs by an $725 million a year, reported The New York Times, which noted that unions agreed to $2.5 billion in annual wage and benefit cuts in 2003. Nearly $700 million would be saved by terminating United’s four employee pension plans and replacing them with a 401(k)-style plan, wrote the paper. In addition, Tilton and seven other top executives would take 15 percent annual pay cuts, according to the report.

Earlier last week, Delta Air Lines Inc. announced that it had signed a commitment letter with GE Commercial Finance for $500 million of financing: $300 million in a senior secured revolving credit facility and $200 million in a senior secured term loan. Up to $100 million of the financing will come from a previously reported deal with American Express Travel Related Services Co. Inc.

The credit facility, which will be collateralized by a portion of Delta’s accounts receivable, will mature three years from the closing date. The loan, which will be collateralized by a pool of a substantial portion of Delta’s remaining unencumbered assets, will be payable in 12 equal monthly installments, beginning on the second anniversary of the closing date.

And on Friday, pilots for Northwest Airlines voted in favor of a new contract that calls for a 15 percent annual pay cut for the next two years, according to The Wall Street Journal. The Air Line Pilots Association has agreed to generate $265 million in savings for Northwest, which wants to slash its total labor costs by $950 million a year, reported the Associated Press.

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