Delta Air Lines Files For Chapter 11 Reorganization To Address
Financial Challenges
After filing bankruptcy, Delta Airlines claims that they
will "continue to operate full flight schedule, honor tickets and
reservations, maintain skymiles program, and provide pay and
benefits to employees.' The following statement was issued by Delta
in the wake of its Wednesday filing for Chapter 11 bankruptcy
relief with a Federal Court:
"Delta Air Lines has announced that to address its financial
challenges and support its ongoing efforts to become a simpler,
more efficient and cost-effective airline, the company and its
subsidiaries have filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Bankruptcy Code.
Delta’s Board of
Directors, in a unanimous decision, directed the company to take
this action after determining that a Chapter 11 reorganization is
in the best long-term interest of the company, its employees,
customers, creditors, business partners and other stakeholders.
Delta expects to continue normal business operations today and
throughout the reorganization process. Specifically, it expects to
continue to:
- Operate its full schedule of flights worldwide;
- Honor tickets and reservations and provide refunds and
exchanges as usual;
- Maintain the SkyMiles program and other customer service
programs;
- Provide amenities like Crown Room Clubs and international
lounges in select cities;
- Provide employee wages, healthcare coverage, vacation, sick
leave and similar benefits without interruption; and,
- Pay suppliers for goods and services received during the
reorganization process.
“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 as we address
our financial challenges and work to secure our future,” said
Delta CEO Gerald Grinstein. “Delta is open for business as
usual and will continue normal operations throughout the
reorganization process. Our customers can be confident that they
remain our number one priority and that their travel plans and
SkyMiles are secure.”
To help support its business during the Chapter 11 proceedings,
Delta has obtained a commitment for $1.7 billion in
debtor-in-possession (DIP) financing from GE Commercial Finance and
Morgan Stanley as Co-Lead Arrangers. The commitment includes up to
$1.4 billion of financing on an interim basis pending final
approval of the full DIP financing at a later date.
In addition to the commitment for the new $1.7 billion DIP
financing, which replaces approximately $980 million in secured
pre-petition financing from GE Commercial Finance and American
Express, Delta has an agreement in principle with American Express
to provide the airline with an additional $350 million of secured
financing. Altogether, Delta’s post-petition financing
arrangements now total up to $2.05 billion, an increase of
approximately $1.07 billion from the company's pre-petition secured
credit facilities.
During the last year, Delta has developed and implemented a
transformation plan aimed at achieving approximately $5 billion in
annual financial benefits by the end of 2006 as compared to 2002.
As of June 30, 2005, Delta had implemented initiatives intended to
achieve approximately 85 percent of these benefits and was ahead of
schedule to meet its target. However, persistent record-high fuel
costs at unpredicted and unprecedented levels and the continued
downward pressure on revenues within the airline industry
substantially outpaced and masked these benefits. Despite doing
everything it could to preserve its liquidity, Delta has determined
that it has no alternative but to utilize the protections and
flexibilities provided by the U.S. bankruptcy laws. Delta intends
to use the additional time and flexibility provided by the Chapter
11 process to expand its transformation plan and move the company
toward a more secure future.
“Delta’s
financial problems are severe, but by no means
insurmountable,” Mr. Grinstein said. “We are optimistic
about our future because we have been working for months on a
business plan that builds on the substantial improvements
we’ve already made and demonstrates that Delta can return to
profitability once the company is able to restructure
appropriately.”
Delta understands that any cost savings that it is able to
achieve while in Chapter 11 must fit within the strategic context
of a sensible business plan that remakes the airline into a
profitable company. Delta has made great strides over the last few
years to adapt itself to the new competitive environment,
undertaking major cost-cutting initiatives and massive network,
scheduling and operational improvements – without adversely
impacting its customer service rankings. As part of these efforts
to improve efficiency and bottom line results, Delta undertook the
largest single-day schedule restructurings in its history,
including the redesign of the Atlanta hub operation and the
elimination of its hub operation at Dallas/Ft. Worth airport. The
airline also restructured its domestic fare system with
industry-leading “Simplifares,” rolled out extensive
new customer-focused airport technology, and outsourced a
significant portion of its heavy maintenance, among other steps.
Delta’s in-court business plan builds on these achievements
and on its competitive strengths and is designed to return the
carrier to profitability.
Delta plans to use Chapter 11 to reconfigure its fleet and
network footprint in a manner that will enhance its revenues.
First, Delta plans to simplify and streamline its fleet by
targeting four aircraft types to be removed by the end of 2006, so
that only seven mainline aircraft types will remain. Second, Delta
plans to deploy smaller aircraft on many of its routes so that it
utilizes the proper-sized aircraft for the route it is flying.
Third, Delta will continue to right-size its hub operations.
Fourth, Delta plans to increase its capacity on international
routes with greater profit potential.
In addition to these
substantial network and operational improvements, Delta has
determined that further job reductions and changes to employee pay
and benefits are a necessary component of its business plan.
“Any changes in pay and benefits will be in the context of a
comprehensive business plan that is equitable and involves other
Delta stakeholders,” said Grinstein. “Importantly,
Delta people at every level and across all work groups also will
have a greater ability than they do now to benefit from our
financial recovery and operational excellence,” he added. The
company said it will be communicating to employees more details
about these changes as early as next week.
On September 12, Delta presented the union that represents Delta
pilots, the Air Line Pilots Association (ALPA), with pilot
cost-saving proposals necessary to help address the company’s
severe challenges. Given its financial situation and the need to
preserve as much cash as possible for its operations, Delta does
not plan to make the qualified defined benefit plan funding
contributions soon due. “Missing contributions does not mean
that our qualified plans stop paying monthly retirement benefits or
that we have initiated the process to terminate the plans,”
Grinstein said.
The company is continuing to pursue pension reform legislation
that might make the plans more affordable. However, because of
Delta’s growing financial pressures, there can be no
guarantees – even with pension reform – about the
future of Delta’s qualified defined benefit pension plans.
“Ultimately, what we can afford in the future airline
business environment, as well as the nature of any legislation,
will determine what is possible,” Grinstein asserted.
He added, “As we deal with our financial challenges, it is
important to keep in mind that Delta – the world’s
second-largest passenger airline, the leading U.S. carrier across
the Atlantic and the third-largest carrier to Latin America –
has formidable strengths: Delta people and the customer loyalty
their superior service inspires; the significant network advantages
derived from having the world’s largest hub (in Atlanta),
supported by our hubs in Cincinnati, Salt Lake City, New York-JFK
and many focus cities; Song – our award-winning, low-fare air
service; and Delta’s cutting-edge, passenger-friendly
technology are but a few of our distinguishing assets.”
He concluded, “As
Delta rises to meet new challenges, I am certain some things will
never change. Our resolve to keep flying while upholding the
highest standards of safety and service will not falter. Our
commitment to the principle that Delta people will share in any
success their sacrifice helps make possible will not waver. Our
gratitude for the loyalty of our customers and the support of the
communities we serve will not subside. And, our pride in this great
company and in one another will not be shaken.”
Delta’s Chapter 11 cases were filed today in U.S.
Bankruptcy Court for the Southern District of New York. Delta has
filed a motion with the Court seeking interim relief that will
ensure the company’s continued ability to conduct normal
operations. If such interim relief is granted by the Court, Delta
will be authorized, among other things, to:
- Provide employee wages, healthcare coverage, vacation, sick
leave and similar benefits without interruption.
- Honor pre-petition obligations to customers and continue
customer programs including Delta’s SkyMiles frequent-flyer
program.
- Pay for fuel under existing fuel supply contracts, and honor
existing fuel supply, distribution and storage agreements.
- Assume contracts relating to interline agreements with other
airlines.
- Pay pre-petition obligations to foreign vendors, foreign
service providers and foreign governments.
- Continue maintenance of existing bank accounts and existing
cash management systems.
Delta’s principal
bankruptcy counsel is Davis Polk & Wardwell. Its financial
adviser is the Blackstone Group. More information about
Delta’s Chapter 11 filing is available on the Internet at www.delta.com/restructure.
Court filings and claims information are available at
deltadocket.com. Delta expects to begin submitting monthly
operating reports to the Bankruptcy Court in November and also
plans to post these monthly operating reports on the Investor
Relations section of delta.com. The company will continue to file
quarterly and annual reports with the Securities and Exchange
Commission, which will also be available in the Investor Relations
section of delta.com."