Human Capital & Careers

Talk about a Sunk Cost

Delta Airlines asks a bankruptcy judge to void options that are permanently underwater, but cost $305,000 a year to administer.
Stephen TaubMarch 21, 2006

When it comes to valuing stock options, most people generally think of their potential worth when exercised, or their utility as a substitute for cash compensation. And investors, of course, worry about their potential dilutive effect on the rest of the shares.

But Delta Air Lines Inc., which is currently in bankruptcy, is worried about a different financial impact from options. The company has asked the bankruptcy court to void options on about 93 million shares held by 70,000 current and former employees and directors.

The reason? The cash-strapped airline says it costs $305,000 a year to maintain, account for, and administer the benefit, which it deems unnecessary, according to the Associated Press.

After all, in a bankruptcy reorganization, equity is the first thing to get wiped out. The exercise prices on the options range from $2.97 to $62.63 a share. Delta’s stock is currently hovering around 47 cents a share. No surprise, then, that Delta says there’s no reason to spend money administering a program that has no potential benefit to anyone.

According to the AP, the company’s motion says its request is supported by the creditor committee as well as the Air Line Pilots Association, whose members hold about one-third of the options Delta is hoping to void.

“The rejection of the Delta stock options will have no practical economic effect on the option holders,” the airline reportedly stated. Nonetheless, there’s a process to be followed: the AP reports that a hearing on the request is scheduled for April 3 in US Bankruptcy Court in New York.