Passengers walk past the tail fin of a Delta Airlines jet at Reagan National Airport outside Washington in this August 19, 2004 file photo. Delta Air Lines' shares fell more than 22 per cent to an all-time low on Monday on widespread market speculation that the number three U.S. airlinewas close to filing for Chapter 11 bankruptcy protection. - REUTERS
NEW YORK (Reuters):
DELTA AIR Lines Inc. and Northwest Airlines, the third- and fourth-largest U.S. air carriers, both declared bankruptcy on Wednesday as the industry's struggle with soaring oil prices and low-cost competition came to a dramatic head.
With the filings, both made in U.S. bankruptcy court in the Southern District of New York, four of the seven largest airlines in the United States are now operating under Chapter 11 federal bankruptcy protection from their creditors.
Both airlines would likely use bankruptcy to slash labour and pension costs, following in the footsteps of No. 2 U.S. carrier United Airlines, the main unit of UAL Corp.
The bankruptcies could put added pressure on other carriers including industry leader AMR Corp., parent of American Airlines, by putting them at a competitive disadvantage as their bankrupt rivals shed costs and ditch pensions, analysts said.
On the other hand, other airlines could benefit if Delta and others cut back on domestic routes, getting rid of overcapacity that has made the U.S. airline sector the most troubled world-wide.
VALUE
"The action we have taken is a necessary and responsible step to preserve Delta's value for our creditors, customers, employees, business partners and other stakeholders," said Delta Chief Executive Gerald Grinstein in a release. "Delta is open for business as usual and will continue normal operations throughout the reorganisation process."
The sector's woes went from bad to worse this month as refinery outages caused by Hurricane Katrina sent jet fuel prices spiking. U.S. airlines are expected to post some US$10 billion in losses this year.
Atlanta-based Delta's problems were compounded by a crushing debt load of more than US$20 billion and one of the industry's biggest underfunded pension burdens.
Founded in 1928, Delta became a top international player by taking over many routes from defunct Pan Am in 1991. It has faced an uphill battle to recovery after getting hammered by the attacks of September 11, 2001, and the slowdown in flying that followed.
"Delta is overleveraged and they weren't going to stay out of bankruptcy, no way," said Ray Neidl, an analyst at Calyon Securities.
LABOUR COSTS
Northwest's woes are focused on high labour costs, which it is trying to slash by US$1.1 billion. Analysts said Northwest, which hired replacement workers to substitute for mechanics and cleaners who struck last month, could be using bankruptcy to get concessions that unions have been reluctant to grant at the bargaining table.
"Northwest must significantly lower its costs to compete with other carriers. Many of these are legacy carriers that have already used the bankruptcy process," said Doug Steenland, Northwest president and chief executive. "We had developed a plan to restructure Northwest outside of Chapter 11 and have been implementing that plan.
"Unfortunately, in addition to an uncompetitive cost structure, our efforts have been overtaken by skyrocketing fuel costs."
Credit rating firm Standard & Poor's said on Wednesday that Northwest's failure to make $42 million in payments due on Tuesday made a bankruptcy filing likely.
