Delta Air Lines shares plunged yesterday on a fresh warning by its chief executive that its reorganization plan was not shielding it from brutal competition, and that the airline would have to do more to avoid seeking bankruptcy protection. Click on Read More for the full story.
The bleak words, contained in a memo to employees from Delta's chief executive, Gerald Grinstein, echoed comments that Mr. Grinstein made last week when Delta announced a $382 million loss for the second quarter. Including its second-quarter loss, Delta has lost nearly $10 billion since the year 2000.
In the memo dated Tuesday, Mr. Grinstein insisted the airline had clearly made progress in its bid to cut $5 billion in costs through next year. "What is also clear is that it is not enough," Mr. Grinstein said.
Today, Delta is set to announce changes to its fall schedule, and is expected to outline its next steps in efforts to streamline operations at its hubs, a person with knowledge of its plans said last night. Delta's program, called Operation Clockwork, began last winter with changes at the hub in Atlanta.
Delta shares fell more than 25 percent immediately after Delta released the memo. They closed at $2.99, down 40 cents, or a 12 percent decline. At one point during the day, Delta stock traded as low as $2.51.
The decline highlighted growing fears among investors that Delta, the nation's third-largest airline, might have to join competitors like United Airlines and US Airways in filing for Chapter 11 protection.
Delta's second-quarter loss actually was a big improvement over its $1.9 billion loss in the second quarter last year, when it faced heavy one-time charges for pilot retirements and other expenses.
But the loss stood out against small profits at Delta's big rivals like American, a unit of the AMR Corporation, and Continental. Low-fare airlines, like Southwest, JetBlue, America West and AirTran, also earned money.
In the memo, Mr. Grinstein touched on that dichotomy, asking, "What's going on?"
One problem, he said, was that the airline was only partly through its revamping plan, including cutting up to 7,000 jobs. "Because it takes time to implement the changes, we do not yet have the benefit of the full savings," Mr. Grinstein said.
And Delta faces more of a challenge from low-fare airlines on its routes than any other big carrier, even though it operates its own low-fare airline, Song, Mr. Grinstein said.
He reiterated his belief that the airline could revamp without seeking Chapter 11 protection. But he added, "Maintaining our momentum is particularly important now because, as this quarter's financial results indicate, time is of the essence," Mr. Grinstein said.
Delta barely avoided a bankruptcy filing last October, after its pilots, which are its only unionized labor group, agreed to grant wage and benefit cuts worth $1 billion a year.
The airline cannot go back to the union for more cuts, unless it files for bankruptcy. There is no clause in Delta's contract with the Air Line Pilots Association that would allow that contract to be reopened in the event of a financial crisis, a spokeswoman for the union said. She declined to elaborate.
But Delta could impose bigger cuts on its other employees, whose pay was cut 10 percent last year. At other airlines, like US Airways, workers' pay has been cut by as much as 35 percent in the last few years.
The airline's best alternative for raising cash quickly could be the sale of its two regional carriers, Atlantic Southeast Airlines, which operates Delta flights across the South, and Comair, which carries passengers in the Midwest and on the East Coast.
Delta and Northwest are pushing hard in Congress for passage of pension reform legislation that would allow airlines to stretch out their overdue pension obligations.
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