• Delta Airlines Rises from the Ashes

  On April 30, 2007, Delta Airlines emerged from bankruptcy leaner but still an independent carrier after a 19-month reorganization during which it successfully fought off a $10 billion hostile takeover attempt by US Airways. The challenge facing Delta's management was to convince creditors that it would become more valuable as an independent carrier than it would be as part of US Airways.

  Ravaged by escalating jet fuel prices and intensified competition from low-fare, low-cost carriers, Delta had lost $6.1 billion since the September 11, 2001, terrorist attack on the World Trade Center. The final crisis occurred in early August 2005 when the bank that was processing the airline's Visa and MasterCard ticket purchases started holding back money until passengers had completed their trips as protection in case of a bankruptcy filing. The bank was concerned that it would have to refund the passengers' ticket prices if the airline curtailed flights and the bank had to be reimbursed by the airline. This move by the bank cost the airline $650 million, further straining the carrier's already limited cash reserves. Delta's creditors were becoming increasingly concerned about the airline's ability to meet its financial obligations. Running out of cash and unable to borrow to satisfy current working capital requirements, the airline felt compelled to seek the protection of the bankruptcy court in late August 2005.

  Delta's decision to declare bankruptcy occurred at about the same time as a similar decision by Northwest Airlines. United Airlines and US Airways were already in bankruptcy. United had been in bankruptcy almost three years at the time Delta entered Chapter 11, and US Airways had been in bankruptcy court twice since the 9/11 terrorist attacks shook the airline industry. At the time Delta declared bankruptcy, about one-half of the domestic carrier capacity was operating under bankruptcy court oversight.

  Delta underwent substantial restructuring of its operations. An important component of that restructuring effort involved turning over its underfunded pilot's pension plans to the Pension Benefit Guaranty Corporation (PBGC), a federal pension insurance agency, while winning concessions on wages and work rules from its pilots. The agreement with the pilot's union would save the airline $280 million annually, and the pilots would be paid 14% less than they were before the airline declared bankruptcy. To achieve an agreement with its pilots to transfer control of their pension plan to the PBGC, Delta agreed to give the union a $650 million interest-bearing note upon terminating and transferring the pension plans to the PBGC. The union would then use the airline's payments on the note to provide supplemental payments to members who would lose retirement benefits as a result of the PBGC limits on the amount of Delta's pension obligations it would be willing to pay. The pact covers more than 6,000 pilots.

  The overhaul of Delta, the nation's third largest airline, left it a much smaller carrier than the one that sought protection of the bankruptcy court. Delta shed about one jet in six used by its mainline operations at the time of the bankruptcy filing, and it cut more than 20% of the 60,000 employees it had just prior to entering Chapter 11. Delta's domestic carrying capacity has fallen by about 10% since it petitioned for Chapter 11 reorganization, allowing it to fill about 84% of its seats on U.S. routes. This compared to only 72% when it filed for bankruptcy. The much higher utilization of its planes boosted revenue per mile flown by 15% since it entered bankruptcy, enabling the airline to better cover its fixed expenses. Delta also sold one of its “feeder” airlines, Atlantic Southeast Airlines, for $425 million.

  Delta would have $2.5 billion in exit financing to fund operations and a cost structure of about $3 billion a year less than when it went into bankruptcy. The purpose of the exit financing facility is to repay the company's $2.1 billion debtor-in-possession credit facilities provided by GE Capital and American Express, make other payments required on exiting bankruptcy, and increase its liquidity position. With ten financial institutions providing the loans, the exit facility consisted of a $1.6 billion first-lien revolving credit line, secured by virtually all of the airline's unencumbered assets, and a $900 million second-lien term loan.

  As required by the Plan of Reorganization approved by the bankruptcy court, Delta canceled its preplan common stock on April 30, 2007. Holders of preplan common stock did not receive a distribution of any kind under the Plan of Reorganization. The company issued new shares of Delta common stock as payment of bankruptcy claims and as part of a postbankruptcy compensation program for Delta employees. Issued in May 2007, the new shares were listed on the New York Stock Exchange.

  Questions:

  • a. To what extent do you believe the factors contributing to the airline’s bankruptcy were beyond the control of management? (10 Marks) – CLO3

  • b. In view of the substantial loss of jobs, as well as wage and benefit reductions, do you believe that firms should be allowed to reorganize in bankruptcy? Explain your answer (5 Marks)