Top Delta Executives Debate Filing for Bankruptcy

[HenryTo]

An update on DAL - the next potential bankruptcy in the U.S.?
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Top Delta Executives
Debate Filing for Bankruptcy

Some Managers Warn CEO
Turnaround Effort Is Futile;
Special Pensions at Risk
By EVAN PEREZ
Staff Reporter of THE WALL STREET JOURNAL
July 21, 2005; Page A1

After aggressively seeking to keep Delta Air Lines out of bankruptcy court, the carrier's senior management is locked in a sharp debate over the company's efforts to save itself, as several top executives and board members in recent weeks have warned Chief Executive Gerald Grinstein that the current turnaround plan may be futile and that avoiding Chapter 11 soon will be impossible.

At the same time, Delta executives have been told that large portions of "bankruptcy proof" special pensions -- granted in 2002 to keep executives at the carrier while it tried to reverse its losses -- might be wiped out if Delta filed for court protection from creditors under Chapter 11. That has stirred concern among top management that Delta could suffer an accelerated departure of key personnel -- with not only executives but other workers taking the cue to exit before a possible bankruptcy-court filing.

Some senior pilots, in particular, could be motivated to leave to secure lump-sum payments for which they are eligible under their pension program. That could trigger a shortage of certain categories of pilots, forcing Delta to ground some aircraft.

John Kennedy, a Delta spokesman, said he was unaware of "such conversations taking place," referring to executives being told that their pensions were at risk. Mr. Grinstein couldn't be reached for comment.

The internal debate about the company's future is emerging just ahead of Delta's issuing quarterly results today. Based on the mean estimate from a Thomson First Call survey of analysts, the carrier is expected to report a quarterly loss of $340 million, or $2.37 a share, compared with a loss of $1.96 billion, or $15.79 a share, in last year's second quarter that included $1.65 billion in noncash charges for pilot-pension costs and the reversal of income-tax credits. Analysts expect Delta's losses for 2005 to approach $2 billion, inflating its overall losses since the start of 2001 to more than $10 billion. Delta's current cash cushion of $2 billion could erode quickly once the peak summer travel season ends after the Labor Day holiday.

The latest dismal results are in sharp contrast to rivals AMR Corp., parent of American Airlines, and Continental Airlines, which yesterday reported second-quarter profits of $58 million and $100 million, respectively, helped by cost cutting and strong travel demand. But even those carriers could have trouble remaining profitable if fuel prices don't drop, analysts said. (See related article.)

The challenges Delta faces also were underscored yesterday when the company's chief financial officer, Michael J. Palumbo, said he was stepping down. A spokesman said Mr. Palumbo quit for personal reasons. He didn't have one of the special pensions because he joined Delta only 14 months ago, after the carrier suspended the program. Mr. Palumbo couldn't be reached for comment.

Delta Airlines senior management believe avoiding Chapter 11 may soon be impossible, reports Evan Perez.

Messrs. Grinstein and Palumbo have been the staunchest advocates in Delta management of the belief that bankruptcy could be avoided, according to people familiar with their views on the matter. The two men long have insisted that the bankruptcy process would be too costly and tie management's hands just as rivals UAL Corp. and US Airways would be preparing to emerge from court protection.

Mr. Kennedy, the Delta spokesman, said, "Our transformation plan was built around avoiding bankruptcy, but there are factors, outside of our control, which may affect our decision to file for Chapter 11."

Other top executives also have left the carrier -- since 2002, 20 of the 35 executives who received special pensions have quit. Among them, two top Delta lawyers, Greg Riggs and Walter Brill, retired last month at least partly as a result of doubts regarding their pensions, according to a person familiar with the situation. Other executives now are wrestling with the decision of either leaving with their special pensions intact or staying and possibly losing hundreds of thousands of dollars in assets in a bankruptcy proceeding.

Several more officials are debating leaving, according to the person familiar with the matter. They include D. Scott Yohe, senior vice president of government affairs and Delta's chief lobbyist on the company's appeal for pension help from Congress, and James Taylor, head of the Delta employee-pension program. Mr. Yohe didn't return calls seeking comment, and Mr. Taylor couldn't be reached for comment.

Delta originally promised to spend $65 million to set up pension trusts in the names of the 35 executives as part of a larger executive-retention program. However, when the program was made public, employees and retired executives were furious. Eventually, Delta curtailed funding of the program at $45 million. Since then, the bulk of the money set aside has been spent on executives who already have departed.

Delta announced the departure of Mr. Palumbo as part of a larger leadership realignment, which included elevating Jim Whitehurst to chief operating officer, from senior vice president and chief network and planning officer. Mr. Whitehurst in effect becomes No. 2 to Mr. Grinstein, 73, who has said he plans to leave next year. Delta said Mr. Palumbo's successor as CFO would be a former company finance executive, Edward H. Bastian, who most recently was CFO of Acuity Brands Inc.

Mr. Grinstein continues to pursue new financing options that could buy Delta additional time, including talks with a consortium of lenders led by General Electric Co.'s commercial lending arm and American Express Co., and intensifying discussions with SkyWest Inc. to acquire Delta's Atlantic Southeast regional carrier.

Still, the growing turmoil in Delta's management ranks presents Mr. Grinstein with a serious challenge to his longstanding commitment to steer Delta away from a bankruptcy-court filing.

After nearly four years of often ingenious restructuring efforts, Atlanta-based Delta has failed to reverse a tide of red ink. Since the start of 2001, Delta has posted losses of nearly $10 billion -- the steepest of any U.S. carrier that hasn't filed for bankruptcy. Unable to shield itself from high fuel prices, Delta earlier this month was forced to abandon its six-month-old $499 cap on one-way, last-minute fares in the U.S., a central element of its turnaround strategy.

The financially strongest U.S. carrier at the beginning of the airline depression in 2001, Delta believed it could complete a dramatic internal restructuring that would make the airline financially viable without taking Draconian steps such as bankruptcy filings and the cancellation of company pensions.

Last September the carrier announced a novel restructuring plan that hinged on turning Delta into a hybrid carrier that married an increased focus on premium long-haul routes with operational techniques that have made rival low-cost carriers profitable. Delta's plan was highly successful in cutting costs and improving service but was built on an assumption of oil selling at about $40 a barrel, not the recent prices hovering around $60.

Now, the increasingly grim situation has forced even Mr. Grinstein, who took over as CEO in January 2004, to more seriously consider bankruptcy protection. In a meeting with employees earlier this month, the CEO said that with oil prices at $60 a barrel, staying out of bankruptcy will be "a hell of a challenge," according to a person present at that meeting.

Write to Evan Perez at evan.perez@wsj.com