Delta to miss pensions

09/15/2005

NEW YORK (Reuters) - Delta Air Lines Inc. (DAL) warned it may miss 3,500 retirees’ pension payments, while Northwest Airlines Corp. (NWAC) hired a battery of lawyers and advisors as the carriers began a long march through bankruptcy.

The moves came as the third- and fourth-largest U.S. air carriers began their Chapter 11 cases a day after they joined United Airlines and US Airways in Chapter 11, after losing an uphill struggle with soaring oil prices and low-cost rivals.

Bonds of both airlines rose as analysts said it would be easier for them to cut wages and operating costs while they are in bankruptcy. Delta shares rose while Northwest’s fell.

Delta pilots suffered what may be the first of many blows for the airlines’ employees as the Atlanta-based carrier said it would send a letter to some 3,500 retired pilots telling them it may miss their October pension payments.

The warning came as AFL-CIO President John Sweeney urged airlines not to “use bankruptcy as a cover to shed workers’ pensions and responsibilities to loyal employees.”

Both Delta and Northwest have said they will focus on reducing flights and switching to smaller planes on some routes, which would almost certainly lead to further layoffs, though neither said how many.

Northwest won court approval to start canceling aircraft leases as it begins to shrink their fleets as part of its reorganization. Delta is asking for permission to do the same.

The Egan, Minnesota-based airline also won court approval to hire a small army of professionals to steer it through bankruptcy court, including at least six different law firms and a financial adviser and restructuring consultant.

‘A LOT OF WORK TO DO’

The cases may be lucrative for such professionals as analysts expect both airlines to remain in bankruptcy for at least 1-1/2 to 2 years.

“They have a lot of work to do,” Standard & Poor’s analyst Jim Corridore said. “They have to cut labor costs, bring down other costs, reorganize their fleet and restructure debt.”

Both said they were operating normally the day after their nearly simultaneous bankruptcy filings, which analysts said were partly driven by the threat of a tougher bankruptcy law scheduled to take effect next month.

The airlines will also work out in bankruptcy court how much to pay creditors.

Delta’s 8.3 percent bonds due 2029 rose to 18.5 cents on the dollar, up about 1-3/4 cents, while Northwest’s notes with a 10 percent coupon due in 2009 rose to 23 cents on the dollar from 22.75 cents on Wednesday, according to MarketAxess.

But Calyon Securities analyst Ray Neidl said the bonds were priced too high. “On the investors side, I still think everything’s overpriced.”

Shares of both carriers will soon be worthless, S&P’s Corridore said. “It will be entirely wiped out when the court approves their reorganization plans, so it’s foolish for anyone to own those shares right now.”

While Northwest shares plunged 53 percent to close at 88 cents on Nasdaq, Delta shares rose 5.6 percent to 75 cents, after earlier gaining as much as 23 percent on the New York Stock Exchange. Northwest stock has plunged 86 percent this year, while Delta has lost more than 90 percent of its value.

NO BARGAIN

Susan Donofrio, an analyst at Fulcrum Global Partners, said retail investors and airline customers may have been buyers. “They hear about a filing, they see an aircraft flying and they assume there’s some value on the stock and that they’re going to get it at a bargain.”

Bankrupt companies’ shares often continue to trade, as they have with airlines UAL Corp. (UALAQ) and US Airways Group Inc. (UAIRQ), but their value is typically wiped out.

While Delta’s filing was expected, Northwest’s came as a surprise to some, including analysts at blue-chip firms J.P. Morgan and Morgan Stanley, who had reiterated their “overweight” ratings on its stock before the filings.

Both carriers’ stocks will also be deleted from the Dow Jones Transportation Average at the close of business on Friday, Dow Jones said.

The airlines’ pension plans are up in the air as both have said they are unable to honor their current commitments.

Both may cancel orders for planes from Boeing Co. (BA) and European archrival Airbus , though analysts said the plane makers would have little trouble placing their aircraft elsewhere.

Delta’s filing could, however, hurt its leasing companies. Computer services company Electronic Data Systems Corp. (EDS) on Thursday said it will take a third-quarter charge to write down the value of its aircraft leases with Delta Airlines. Walt Disney Co. (DIS) on Wednesday said it may have to write down $100 million of Delta leases.