Delta to sell unit, says bankruptcy possible

WASHINGTON - Delta Air Lines Inc said on Monday it would sell its Atlantic Southeast Airlines Inc regional airline unit for US$425 million ($609.05 million), but disclosed a steadily worsening financial picture and did not rule out seeking bankruptcy protection.

The No. 3 airline said in a filing with the US Securities and Commission that its liquidity would "decline substantially" throughout the remainder of 2005 despite the planned sale of the regional unit for cash to Skywest Inc.

Delta said cash flow would not be sufficient to meet its needs for the second half of the year and would record a substantial net loss for the six months ending December 31.

"If our liquidity declines to an unacceptably low level or we conclude that a competitive cost structure cannot be achieved through an out-of-court restructuring, we will need to seek to restructure under Chapter 11," the airline said.

At the end of June, Delta had US$1.7 billion in cash, cash equivalents and short-term investments. But the company estimates payments for leases, interest capital expenses, and pension obligations would total at least US$2 billion through December.

Other factors will also affect the bottom line, including the status of financing agreements with General Electric's commercial finance unit and American Express travel services. Terms of those agreements require that Delta maintain US$1 billion in unrestricted cash. Delta has been in compliance with those covenants but believes it would "fail to satisfy them" at some point before the end of the year.

Another uncertainty is whether the airline can successfully negotiate a new agreement for processing credit card charges, a necessity of doing business. Delta said in its SEC filing that it had renegotiated terms with its existing processor through October 31.

But the proposal for a long-term deal, which involves a third party, would require Delta to deposit US$750 million up front. The airline, which is also deep in debt, said it was seeking alternatives to that cash requirement.

Finally, Delta's costs could go up further if more pilots retire. Delta said in its filing that more than 560 pilots retired between January 1 and August 1, including 475 of whom took early retirement. Delta said the early retirement rate is substantially above normal. Approximately 1200 of Delta's 6300 active pilots are at or over 50 and are eligible to retire on September 1.

Proceeds from the sale of the Atlantic Southeast regional affiliate, which is expected to close in September, would be used to pay down US$100 million in debt, Delta said in a statement. But the deal would not provide as much cash as it needs to turn its fortunes around, Delta said. The company has lost almost US$10 billion since 2001. Most recently it has been rocked by record high fuel prices.

Even proposed cost cuts of US$5 billion through 2006 from labour and other sources would not alone stave off bankruptcy, Delta chief executive, Gerald Grinstein, said last month.

Delta stock hit another record low on Monday even before the bleak financial outlook was disclosed, prompting more talk on Wall Street of potential court restructuring.

"We still maintain that we see an extremely high risk of bankruptcy over the next 6 to 12 months," Standard & Poor's analyst Jim Corridore said before Delta filed its updated financial information with the SEC.

"But the airline might file sooner, maybe in the next couple of months, to take advantage of the more lenient bankruptcy laws," Corridore added.

Delta shares closed dropped 22 cents to US$1.39 on the New York exchange. But shares bounced back by 26 per cent in after hours trading on Inet to US$1.75.

- REUTERS