Another UAL in the making...?
Current issue of Speednews...************** COVER STORY: DELTA RUNNING ON FUMES **************
Delta announced this week that if it is unsuccessful in further reducing its operating expenses and continues to experience significant losses, the airline will need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.
Delta says it does not expect to achieve the full $5b in targeted benefits under its transformation plan until the end of 2006. In addition, it continues to face significant challenges due to historically high aircraft fuel prices, low passenger mile yields and other cost pressures. Accordingly, it believes that it will record a substantial net loss for the nine months ending December 31, 2005, and that its cash flows from operations will not be sufficient to meet all of its liquidity needs for that period.
It adds that its ability to fund its obligations and maintain adequate liquidity for the nine months ending December 31, 2005, will depend on a number of factors outside of its control, including the level of aircraft fuel prices and passenger mile yield; the terms of renewal or replacement Visa/Mastercard processing contract; and other factors. Because substantially all of its assets are encumbered and its credit ratings are low, it does not expect to be able to obtain any material amount of additional debt financing. Unless it is able to increase revenues, further decrease costs, sell assets or access the capital markets by issuing equity or convertible debt securities in sufficient amounts to offset those factors outside its control, Delta expects that its cash and cash equivalents and short-term investments will be
substantially lower at December 31, 2005 than at March 31, 2005.
Its current GE Commercial Finance Facility and its financing agreement with Amex include covenants that are based on its business plan and impose substantial restrictions on financial and business operations, including covenants that require the airline (1) to maintain specified levels of cash and cash equivalents and (2) to achieve certain levels of EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent, as defined) ("EBITDAR Covenant").
As of March 31, 2005, Delta was in compliance with its financial covenants. However, it says that there is significant uncertainty whether it will be in compliance with all of these covenants in the near-term or in future periods due to:
-The volatility of fuel prices, which remain at historically high levels.
-The expiration of Delta's current Visa/MasterCard processing contract in August 2005 and the likelihood that renewal or a replacement processing contract will require a significant cash holdback to cover the processor's exposure for tickets sold, but not yet flown.
-The potential that other assumptions underlying its business plan may be incorrect in any material adverse respect. Many of these assumptions are not within the airline's control, such as passenger mile yield, actions by competitors, pension funding obligations, interest rates, the achievement of all of the approximately $5b of targeted benefits (compared to 2002) of the airline's transformation plan, and access to financing.
Delta concludes that if it continues to experience significant losses, it would need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code; and a restructuring under Chapter 11 may be particularly difficult because Delta has pledged substantially all of its remaining unencumbered collateral in connection with transactions completed in the December 2004 quarter as a part of its out-of-court restructuring.
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It would appear that another US airline domino is about to fall.