By KIRSTENTAGAMI The Atlanta Journal-Constitution Published on: 03/11/05 High fuel costs are causing a drag on Delta Air Lines' recovery plans and renewing the threat of a bankruptcy filing by late this year. The Atlanta-based airline, stuck in a deep slump since 2001, warned in a filing with the Securities and Exchange Commission on Thursday that it expects "substantial" losses this year and may have to seek bankruptcy protection unless its finances improve. With jet fuel at $1.54 a gallon Thursday, Delta's chances of quickly making progress toward profitability looked dim. Fuel typically is an airline's second-biggest cost, after labor. Delta said its turnaround plans ? which include deep job and pay cuts, a fare overhaul and other changes ? assume average fuel prices of $1.22 per gallon this year. The airline said it will burn through an additional $25 million this year for every penny increase in the price of fuel. "Given where crude oil is today, that's a significant hit to the bottom line," said Brian Hayward, an airline analyst for Zacks Investment Research. He noted that many industry watchers expect fuel prices to remain high for some time. Hayward thinks there's a 50-50 chance Delta, which narrowly averted a bankruptcy filing last fall, will seek Chapter 11 court protection by the end of the year if fuel prices stay at current levels. Chapter 11 enables a company to remain in business while renegotiating debts under a judge's supervision. Oil prices have jumped more than 10 percent in the past two weeks, nearing $55 a barrel earlier this week. Shakeout possible? Delta isn't the only airline feeling the pain. "It's going to be very difficult for any airline to make money as [oil] approaches $60 a barrel," said Tad Hutcheson, spokesman for AirTran Airways, Delta's biggest competitor in Atlanta. AirTran has been mostly profitable in the past two years, but profits fell sharply in the final half of 2004. Hutcheson added that fuel prices may cause a shakeout in the industry, forcing some weaker players out of business. For now, they are prompting airlines to raise fares ? something the industry has notoriously been unable to do because of cutthroat competition. But analysts say recent moves to add a few dollars to fares are sticking as all airlines grapple with fuel costs. Delta, which has posted net losses of nearly $7 billion since 2000, avoided bankruptcy last fall by winning deep pilot pay cuts, getting emergency financing, and announcing other turnaround measures. But the company doesn't expect to achieve the full $5 billion in cost savings from the restructuring until the end of 2006. As part of its cost-saving plan, Delta announced this week that it is removing pillows from domestic flights and raising prices for alcoholic drinks from $4 to $5 in coach. Stock price falls Delta shares fell 56 cents to $4.33 Thursday. The shares dipped below $3 last fall at the height of bankruptcy talk, then climbed as high as $7.88 in December when fuel prices subsided for a time. Analysts have said all along they look for more red ink at Delta in 2005, but that signs of recovery should emerge as cost cuts kick in. The company's SEC filing Thursday presented a "somewhat more negative view than they had expressed before," said Philip Baggaley, an airline credit analyst with Standard & Poor's Rating Service. The two reasons, he said, are the higher-than-expected fuel prices, and the fact that companies must take a cautious view in their SEC filings to properly warn investors of the risks. Baggaley said in a report last month that airlines face increased risk of "widespread simultaneous bankruptcies" if fuel prices remain high. Unless conditions change, things are likely to be "somewhat uncomfortable" for Delta by late fall, he said Thursday. Cash level important Delta warned in its filings that recent financing agreements with GE Commercial Finance and American Express require the company to maintain certain levels of cash. If Delta falls below those levels for any reason, it could force the company into bankruptcy. Delta said in its filings that it will meet its cash needs for 2005 in part by tapping available cash and the final $250 million it borrowed from American Express. Because much of the company's assets have already been pledged for loans and its credit rating has been substantially lowered, "we do not expect to expect to obtain any additional amount of debt financing," Delta said in its filing. That could force the airline to sell assets to raise cash. Delta reportedly is considering selling one or both of its regional airline subsidiaries, Atlantic Southeast Airlines and Comair, according to an executive at SkyWest, a growing Utah-based regional carrier that might be a buyer. Bankruptcy changes A bill passed Thursday by the U.S. Senate would produce the biggest change in federal bankruptcy laws in more than 25 years but would have little effect on Delta, if it were to file bankruptcy. The bill is focused on individuals rather than companies, said Darryl Laddin, chairman of the bankruptcy group at Arnall Golden Gregory LLP in Atlanta. However, the new law would place a limit on the time that a judge could give companies such as Delta to come up with a bankruptcy plan without the interference of creditors ? no more than 18 months instead of possibly several years. __________________________________________________ Do You Yahoo!? Tired of spam? Yahoo! Mail has the best spam protection around http://mail.yahoo.com