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Watch the trailer at: http://www.foxsearchlight.com/theclearing/index_nyt.html \----------------------------------------------------------/ Costs Put Delta in the Cross Hairs of Crisis June 4, 2004 By MICHELINE MAYNARD Before the September 2001 terrorist attacks, Delta Air Lines perennially led the airline league, with lower costs than competitors like American or United and plenty of loyal customers. The company's costs have barely risen since then, which in another industry might be something to brag about. But for Delta, it is a big problem - and the main reason why it is the latest major airline to be swept by a financial crisis. As airline chief executives pleaded for help in a Congressional hearing yesterday, Wall Street began to worry that Delta could decline much more swiftly than anticipated. Even so, Representative John L. Mica, the Florida Republican who heads the House aviation subcommittee, told the executives that the airlines would have to "fend for themselves" and could not expect any more significant help from the government. "Congress is not going to underwrite losing airline operations," Mr. Mica said. The airline in the spotlight right now is Delta, which for years was considered one of the soundest and best managed of the majors. On May 10, the airline said it might have to file for bankruptcy protection unless it could slash costs and win steep concessions from its pilots' union. Many of Delta's rivals have managed to cut their costs by double-digit percentages in the years since the terrorist attacks by going that route - either filing for bankruptcy protection, like United, or threatening to file, like American. In the process, they erased Delta's onetime efficiency advantage, leaving it with what are now among the highest costs in the industry. Then jet fuel prices began to skyrocket, climbing by nearly half in the last year, and stiff competition from low-fare carriers has kept everyone in the industry from recouping the higher costs through increases in ticket prices. Together, the developments have put fierce pressure on Delta. In recent days, the airline has reinforced its warning about the state of its finances by hiring restructuring advisers to identify ways to streamline its debts and its operations. "It is Delta's moment," said Michael Allen, chief operating officer of Back Aviation, an industry consulting firm. Jamie Baker, who follows airlines for J. P. Morgan, reported yesterday that he expected Delta to lose $7.78 a share in 2004, almost 60 percent more than his previous estimate of $4.93. Mr. Baker said the airline could be in Chapter 11 by the end of the year. That Delta feels obliged to talk about a bankruptcy filing is sobering for the industry, experts said, demonstrating that however well run an airline has been, none can afford to stand still in today's troubled business environment. And there is no relief in sight from the twin pressures on costs and revenues. "The fear is that this is a lasting problem that they will have to deal with," said Philip A. Baggaley, an airline analyst with Standard & Poor's. Mr. Baggaley, who testified at yesterday's hearing, said that this should have been a good year for the airlines. The economy is healthy, many flights are full and summer traffic volume is expected to be the strongest since 2001. Yet the Air Transport Association, an industry trade group, estimates airlines will lose $3 billion in 2004. Why? Airline executives have a uniform answer: jet fuel, which costs more than $1 a gallon, compared with about 76 cents last June. While some airlines have insulated themselves from part of the impact through hedging contracts, others did not, or in United's case could not, because of its December 2002 bankruptcy filing. United now expects its fuel bill for the year to run $750 million over its forecast, complicating its bid for a $1.6 billion package from the Air Transportation Stabilization Board, created by Congress after the Sept. 11 attacks to oversee $10 billion in loan guarantees and other assistance. Yesterday, the board's executive director, Michael Kestenbaum, said the federal government owned stakes equivalent to $100 million in six airlines that received loan guarantees totaling $1.8 billion. Airlines say the damage from fuel costs would not be so severe if they could pass the costs along to consumers by charging higher fares, as they were able to do when oil prices spiked in the past. Not this time, though. Numerous attempts by Continental, Northwest and other carriers to raise fares by $5 to $20 a ticket have largely failed, because low-fare airlines flying the same routes undercut them. The ease with which consumers can comparison shop on travel Web sites has also hindered the airlines' efforts to raise fares, Mr. Allen said. "There is no pricing power," he added. That leaves the airlines little choice but to find more cost cuts across their businesses. Delta, with more than $20 billion of debt on its balance sheet, has been conducting a complete strategic review since the beginning of the year. The chief executive, Gerald A. Grinstein, wants to present a restructuring plan to Delta's board late in the summer. To develop it, Delta has retained the Blackstone Group, a specialist in debt restructuring, and Davis, Polk & Wardwell, a law firm it has used on financial matters, according to people who had been briefed on the matter. Delta executives said the company routinely got advice from legal and financial experts and declined to discuss which advisers it had retained. Mr. Allen said Delta's efforts were meant to communicate a sense of urgency, like the one American created a year ago when it repeatedly threatened to file for Chapter 11 protection if employees refused to accept wage and benefit cuts. "If you drive as if you are going to run into the wall, that's when action takes place," he said. "It will probably take coming very close to the edge before anything of a serious nature comes about." But, Delta's pilots, whose contract expires next May, are not required to sit down with the company until Aug. 3. They have already rejected a Delta proposal to cut wages and benefits by 30 percent, saying 9 percent would be more acceptable. Mr. Baggaley said Delta could cite its rivals as cautionary lessons in talks with the unions, because without concessions from workers, "United would be shut down, American would be bankrupt, and Continental never would have come out of bankruptcy" in the 1990's. For proof of the value of acting to pre-empt problems, Delta need only look to the industry's biggest low-fare carrier, Southwest Airlines. In addition to actively hedging its exposure to fuel prices, Southwest has been modifying its Boeing 737 jets by adding winglets, small extensions curving up and out from the wingtips, to reduce drag and save fuel. Southwest considered the move for years, but was loath to take its tightly scheduled planes out of service for several days each to install them. Last year, though, when it seemed that jet fuel might climb over 80 cents a gallon, Southwest calculated that the time was right, said James C. Wimberly, an executive vice president and chief of operations. Now, it is adding winglets to 66 of its 162 Boeing 737-700 planes, at a rate of 10 to 12 a month, and is having them installed on all new jets it buys, Mr. Wimberly said this week. Southwest expects the winglets to cut fuel consumption by as much as 3.5 percent on each flight and save $2 million a quarter. "We have been very, very happy with the performance," he said. Delta and its rivals must follow Southwest's example, forget about fare increases and focus relentlessly on cost-cutting, said Robert W. Mann Jr., an industry consultant based in Port Washington, N.Y. "The only long-term answer is productivity improvements," Mr. Mann said. The time to make those improvements is short. Delta and the other majors "have only what is left of this business cycle to implement changes and repair their balance sheets," he said. "Those that fail will be unable to weather the next cyclical downturn." http://www.nytimes.com/2004/06/04/business/04air.html?ex=1087357701&ei=1&en=d0b1a8c67e52fc00 --------------------------------- Get Home Delivery of The New York Times Newspaper. Imagine reading The New York Times any time & anywhere you like! Leisurely catch up on events & expand your horizons. Enjoy now for 50% off Home Delivery! Click here: http://homedelivery.nytimes.com/HDS/SubscriptionT1.do?mode=SubscriptionT1&ExternalMediaCode=W24AF HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@xxxxxxxxxxx or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@xxxxxxxxxxxx Copyright 2004 The New York Times Company