Delta Flies out of Bankruptcy

Early this morning, Delta Airlines came out of bankruptcy protection as a reorganized air carrier. While in its 19-month time-out, it managed to trim $3 billion in costs. It emerges from Chapter 11 with $2.5 billion to fund operations, and it is the third largest carrier by passenger miles flown, after American and United. The question, though, is the same it faced a year and a half ago; can Delta fly profitably?

The best answer is one based on probability. It is in much better shape now than it was in 2005. This was true back when US Air made a $10 billion bid for Delta, and Delta convinced its creditors that they would be better served by keeping Delta independent. The creditors, who have no interest in anything before their monetary concerns in this case, agreed. That’s quite a testament to the potential of Delta.

Delta CEO Gerald Grinstein may actually be one of the few CEO’s in America who earned his pay check in full (well, probably not even him, but he came a bit closer than others). Taking a company that is hemorrhaging cash and halting the bleeding isn’t that hard. Doing it in such a way that there’s still a functioning company when the surgery is over is more difficult. He managed to do that, and he has signaled that it’s time for him to go. While his successor hasn’t been named, he has made it clear he prefers an internal candidate. Again, a vote for the guys who are fixing Delta up.

That said, there are two things that haven’t changed for Delta. First, JetBlue, AirTran and other low-cost carriers still have better cost structures. Second, oil and jet fuel distillates haven’t dropped in price. There will, of course, always be competitors, and everybody has to buy jet fuel. Chief Financial Officer Edward Bastian said in a statement, “Delta used the Chapter 11 process to completely transform every aspect of our business ... That will enable us to weather future volatility in the airline industry.” Whether Mr. Grinstein did enough to strengthen Delta against those pressures remains to be seen.

The restructuring didn’t come easily, and there were some serious losers in the process. As of Thursday, the New York Stock Exchange will again see “DAL” on its ticker. These shares, though, are new Delta shares. The pre-bankruptcy shares got cancelled as always happens in bankruptcy cases. Holders of those shares may want to save them for a few years and then offer them on eBay as historical documents or wall paper – as stock, they are worthless. That is how capitalism punishes failure.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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