Delta Raising Cap

[HenryTo]

The stock rose over 17% today due to this, lower oil prices, and possibly because of the LUV report as well. However, note the following:

"He [Delta spokesman] also noted that the sales of full walk-up fares and some three-day advance purchases account for less than 6 percent of tickets the airline sells." JP Morgan only expects an additional $80 million revenue annually from this move - nowhere near enough to save the company from bankruptcy.
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Delta Raises Fair Cap, Airlines Follow
Thursday July 14, 8:51 pm ET
By Harry R. Weber, AP Business Writer
Delta Raising Cap on Its Most Expensive Fares by $100, United, Continental Match

ATLANTA (AP) -- Delta Air Lines Inc. blamed persistently high fuel costs Thursday as the nation's third-biggest carrier raised the cap on its most expensive fares by $100, a move that was quickly matched by several rivals. Airline stocks rose on the news.

Atlanta-based Delta boosted the cap on one-way walk-up fares to $599, up from $499, for economy class and to $699 for first class. The move comes six months after the company announced a ticket price overhaul designed to draw in more business travelers.

The adjustment affects full-fare walk-up and some three-day advance purchases. United Airlines, Continental Airlines, Northwest Airlines and American Airlines matched the move.

"When Delta launched SimpliFares in January, crude oil was selling at $43 per barrel compared to as much as $61 per barrel in recent weeks," said Paul Matsen, Delta's chief marketing officer. "Despite our best intentions to keep the current fare caps in place, we have been forced to find ways to offset this dramatic spike in costs."

Following the nationwide launch of Delta's fares program in January, other major carriers lowered their most expensive fares as well.

Industry expert Terry Trippler, who runs a ticket fare Web site called cheapseats.com., said Thursday that he expected other airlines to hike their one-way fares following Delta's changes. "You could almost bet the rent on that one," Trippler said.

He was right, with Houston-based Continental and United, a unit of Elk Grove Village, Ill.-based UAL Corp., doing so within hours of Delta's announcement.

Northwest Airlines Corp., based in Eagan, Minn., also matched Delta's fare change, spokesman Kurt Ebenhoch said. Northwest has twice before tried to raise fares above Delta's cap, by $50, but failed in being able to maintain the increase.

American Airlines, a unit of AMR Corp. in Fort Worth, Texas, did not immediately announce its plans, but Trippler said Thursday night that American's fares had risen to match Delta's. Trippler checks the reservation systems travel agents use, which are not generally accessible outside that industry.

Delta spokesman John Kennedy said the SimpliFares program has helped draw in more business customers over the last several months, though he didn't have any hard numbers. He said that despite the changes being made Thursday, there are still many benefits to the program.

"The cap was merely part of the package so that people would know that they would never travel for more than this amount, and we've simply adjusted that," Kennedy said.

He also noted that the sales of full walk-up fares and some three-day advance purchases account for less than 6 percent of tickets the airline sells. "We had to be realistic here," Kennedy said.

Delta declined to say how much its one-way fare cap increase will generate in additional revenue.

The carrier is continuing to offer the fares without a Saturday-night stay-over requirement. It also is keeping its reduction of most special service fees to $50 and 1,000 bonus miles for tickets purchased on the company's Web site.

Delta has been trying to cut costs to avoid bankruptcy, but high fuel costs have caused its losses to continue to mount.

Delta declined to say how much its one-way fare cap increase will generate in additional revenue. JP Morgan airline analyst Jamie Baker said in a research note Thursday that he estimates only an incremental $80 million of annual revenue production for Delta because of the move, "insufficient to materially affect its Chapter 11 probability."

"We'll let others sing the praise of cap-raising," Baker said. "Frankly, we don't see what all the fuss is about."

The fare hike announcement comes a week before Delta releases its second-quarter results. Analysts expect it to record another heavy loss. It lost nearly $1.1 billion in the first quarter and $5.2 billion for all of 2004.

"I think it's no surprise this is coming just prior to the second-quarter earnings," Trippler said. "This is showing us Delta has stepped back, taken a deep breath and said, 'We need to make some changes.'"

He doesn't expect a negative reaction from travelers, who he says have gotten used to higher transportation costs because of ballooning gas prices. "They're going to have to pay higher prices," Trippler said.

Calyon Securities analyst Ray Neidl said Delta's move is not surprising in the face of high fuel prices.

"I just knew they couldn't resist much longer," Neidl said. "They're probably facing reality now about oil prices."

He said the fare cap increase alone will not keep Delta from bankruptcy, noting that it still needs to raise cash in other ways, possibly by selling some assets.

Delta shares rose 61 cents, or 17.7 percent, to close at $4.05 on the New York Stock Exchange. AMR shares rose $1.08, or 8.4 percent, to finish at $13.87 on the NYSE, while shares of Continental Airlines Inc. gained 59 cents, or 4 percent, to $15.35. Northwest shares rose 31 cents, or 6.6 percent, to end at $5 on the Nasdaq Stock Market.

AP Business Writers Dave Carpenter in Chicago, Josh Freed in Minneapolis and Matt Slagle in Dallas contributed to this report.

Delta Air Lines Inc.: http://www.delta.com

[HenryTo]

Most of the operating costs are variables which I am not familar with but one thing I can "speculate" is their fuel costs. According to their latest 10-Q, "Our business plan assumes that the average annual jet fuel price per gallon in 2005 will be approximately $1.22 (with each 1¢ increase in the average annual jet fuel price per gallon increasing our liquidity needs by approximately $25 million per year, unless we are successful in offsetting some or all of this increase through fare increases or additional cost reduction initiatives). During the March 2005 quarter, our average jet fuel price per gallon was $1.42."

Moreover, the fuel costs for the first quarter of 2005 was $884 million basis a $1.42 fuel price. Their business plan assumes an average price of $1.22 for 2005, and therefore, they are already 20 cents per gallon above target - which means they are under target by $500 million in liquidity needs for this year if current fuel prices (for the rest of 2005) remain what they were during the first quarter of this year.

But fuel prices for the 2nd quarter of this year has been higher. The daily average WTI crude oil spot price was approximately $53 a barrel - which translated to a 6.38% increase over the average crude oil price for the first quarter of 2005. Applying the 6.38% adjustment to the $1.42 fuel price gives us $1.51 a gallon - which means a further annual drain of $225 million. Oil prices, as I am typing this, are at $58.50 - which if it remains steady for the rest of the third quarter, will mean a further 10% adjustment to the $1.51 a gallon price - an additional 15 cents which adds a still further drain of $375 million.

Which means that for the 12 months going forward, there may be a potential downside surprise of $500 million + $225 million + $375 million = $1.1 billion just from fuel prices only. To meet Delta's fuel target of $1.22 a gallon going forward, the price of crude oil will need to decline to approximately $43 a barrel assuming a 100% correlation between crude oil and jet fuel prices.

Of course, I am no expert on this - so anyone - please correct me if you think I have erred in the above "analysis!"

[HenryTo]

My guess is that they will try to sell off more assets in order to save the company, but the creditors may have different ideas if all they see is management throwing good money after bad. That is, if creditors can recovery substantially more assets as of right now, why not push them into Chapter 11 right now? From the creditors' point of view, this a much better scenario than selling off assets to fund the pension plans and to subsidize artificially lower cheap airfares, etc.

Following is something I copied and pasted from the "liquidity" section of the latest 10-Q of DAL:

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At March 31, 2005, we had cash and cash equivalents and short-term investments totaling $1.8 billion. During the March 2005 quarter, net borrowings totaled approximately $355 million, which included (1) the final installment of $250 million under our financing agreement with American Express Travel Services Company, Inc. (“Amex”); (2) $85 million under a commitment from a third party to finance on a long-term secured basis our purchase of five regional jet aircraft delivered to us during the March 2005 quarter; and (3) $20 million in net borrowings under the revolving credit facility which is part of our financing agreement with GE Commercial Finance and other lenders (“GE Commercial Finance Facility”). Except for commitments to finance our purchases of regional jet aircraft in 2005 and 2006, we have no available lines of credit. For additional information about these arrangements, see Notes 3 and 12 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q. For additional information about the GE Commercial Finance Facility and our financing agreement with Amex, see Note 6 of the Notes to the Consolidated Financial Statements in our Form 10-K.

We have significant obligations due in the nine months ending December 31, 2005 and thereafter. Our obligations due in the nine months ending December 31, 2005 include approximately (1) $700 million of operating lease payments; (2) $850 million of interest payments, which may vary as interest rates change on our $5.6 billion principal amount of variable rate debt; (3) $640 million in debt maturities, approximately $510 million of which we expect will be cash payments (for additional information about these debt maturities, see Note 3 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q); and (4) $230 million of estimated funding for our defined benefit and defined contribution pension plans. Absent the enactment of new federal legislation which reduces our pension funding obligations during the next several years, our annual pension funding obligations for each of 2006 through 2008 will be significantly higher than our approximately $450 million in annual pension funding obligations in 2005 and would have a material adverse impact on our liquidity.

For additional information about our future pension funding obligations and proposed pension funding legislation, see “Financial Condition and Liquidity — Pension Plans” below. For additional information about our contractual commitments, see “Financial Position — Contractual Obligations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K.

During the nine months ending December 31, 2005, we expect capital expenditures to be approximately $690 million. This includes approximately $300 million for aircraft expenditures, which includes $280 million to purchase 15 regional jets which we intend to finance under certain financing arrangements (see Notes 3 and 12 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q). Our aircraft expenditures exclude approximately $230 million to purchase six B-737-800 aircraft because we have entered into a definitive agreement to sell these aircraft to a third party immediately following their delivery to us by the manufacturer in 2005 (see Note 4 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q). Our anticipated capital expenditures for the nine months ending December 31, 2005 also include approximately $145 million for aircraft parts and modifications, and approximately $245 million for non-fleet capital expenditures.

As discussed above, we do not expect to achieve the full $5 billion in targeted benefits under our transformation plan until the end of 2006. In addition, we continue to face significant challenges due to historically high aircraft fuel prices, low passenger mile yields and other cost pressures. Accordingly, we believe that we will record a substantial net loss for the nine months ending December 31, 2005, and that our cash flows from operations will not be sufficient to meet all of our liquidity needs for that period.

Our ability to fund our obligations and maintain adequate liquidity for the nine months ending December 31, 2005, will depend on a number of factors not within our control, including the level of aircraft fuel prices and passenger mile yield; the terms of our renewal or replacement Visa/Mastercard processing contract; and other factors discussed below. Because substantially all of our assets are encumbered and our credit ratings are low, we do not expect to be able to obtain any material amount of additional debt financing. Unless we are able to increase our revenues, further decrease our costs, sell assets or access the capital markets by issuing equity or convertible debt securities in sufficient amounts to offset those factors outside our control, we expect that our cash and cash equivalents and short-term investments will be substantially lower at December 31, 2005 than at March 31, 2005. There can be no assurance that we will be able to implement any of these strategies or that these strategies, if implemented, will be sufficient to enable us to maintain adequate liquidity.

Our GE Commercial Finance Facility and our financing agreement with Amex include covenants that are based on our business plan and impose substantial restrictions on our financial and business operations, including covenants that require us (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”). These agreements also contain customary events of default, including cross defaults to each other and to certain of our other debt and obligations. For additional information about our financial covenants, see Note 3 to the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.

At March 31, 2005, we were in compliance with our financial covenants. However, there is significant uncertainty whether we 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. Crude oil is a component of jet fuel. Crude oil prices are volatile and may increase or decrease significantly. Our business plan assumes that the average annual jet fuel price per gallon in 2005 will be approximately $1.22 (with each 1¢ increase in the average annual jet fuel price per gallon increasing our liquidity needs by approximately $25 million per year, unless we are successful in offsetting some or all of this increase through fare increases or additional cost reduction initiatives). During the March 2005 quarter, our average jet fuel price per gallon was $1.42. The forward curve for crude oil currently implies substantially higher fuel prices for the remainder of 2005 than our business plan assumes. We have no hedges or contractual arrangements in place that would reduce our jet fuel costs below market prices.

• the expiration of our current Visa/MasterCard processing contract in August 2005 and the likelihood that our renewal or replacement processing contract will require a significant cash holdback to cover the processor’s exposure for tickets sold, but not yet flown. Our Visa/MasterCard processing contract is important to our business because a substantial number of tickets that we sell are purchased using Visa or MasterCard credit cards.

• the potential that other assumptions underlying our business plan may be incorrect in any material adverse respect. Many of these assumptions are not within our control, such as passenger mile yield, actions by competitors, pension funding obligations, interest rates, the achievement of all of the approximately $5 billion of targeted benefits (compared to 2002) of our transformation plan, and our access to financing.


Due to the volatility of fuel prices, we are currently seeking an amendment to the EBITDAR Covenant to reduce the level of EBITDAR we are required to achieve. We cannot predict the outcome of this matter.

Failure to comply with the financial covenants or certain other requirements of the GE Commercial Finance Facility and our financing agreement with Amex could result in the outstanding borrowings under these agreements becoming immediately due and payable (unless the lenders waive any resulting event of default). If this were to occur, or if our level of cash and cash equivalents and short-term investments otherwise declines to an unacceptably low level, we would need to seek to restructure under Chapter 11 of the U.S. Bankruptcy Code.

[nodoodahs]

Delta Air Lines reminds me of the zombies in "Resident Evil." Dead but still moving, at least for a while.

As of YE 2001 the shareholders' equity was $4 bil. By YE 2002 it was $1.2 bil. By YE 2003 the shareholders' equity was negative.

By YE 2003 there were at least four consecutive years of negative free cash flow.

As of YE 2003 there were three consecutive years of losses, three consecutive years of shrinking revenues, three consecutive years of shrinking net worth, three consecutive years of interest payments taking over 60% of the pre-interest OCF.

I'm not a corporate bankruptcy expert, but I find it hard to imagine they can escape it, and lord only knows what'll happen to the stockholders when it does happen. You'd probably be better off holding their bonds then their stock, you'd have a chance at owning something worthwhile after the bankruptcy ... unless you find a bigger fool.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.