/ 29 April 2007

US airlines see sunnier skies

Delta Air Lines is set to emerge from 19 months of bankruptcy protection in another sign that one of the bleakest chapters for the United States airline industry may be coming to an end.

The third-largest US carrier could exit Chapter 11 bankruptcy as early as Monday after a judge approved the final details of reorganisation, leaving Delta with about $2,5-billion in financing.

Delta and Northwest Airlines filed for creditor protection on the same day in September 2005, which at the time left four of the top six carriers in bankruptcy.

Since that time, the remaining carriers with the exception of Northwest have emerged from court supervision and the financial picture of the industry has markedly improved.

”This is an exciting day for everyone at Delta,” said Gerald Grinstein, Delta’s chief executive, after winning court approval of the exit plan.

”Achieving a turnaround of this magnitude in little more than 19 months would not have been possible without the hard work and dedication of Delta people worldwide, and the leadership, the vision and the flawless execution of our plan by our outstanding management team.”

Delta lost $6,2-billion in 2006 amid a hefty $5,4-billion charge for reorganisation.

The carrier posted a much narrower $130-million loss in the first quarter of 2007, but sees its financial picture improving after major cost-cutting efforts.

”Delta has fundamentally transformed into a thriving industry leader,” said Grinstein. ”We are stronger — financially, operationally, and in spirit — and Delta is ready to return to its traditional leadership position in this highly competitive industry.”

The US airline industry has been struggling with its worst crisis since the September 11 2001 attacks triggered a slump in air travel and carriers were hit with record-high fuel prices.

The Air Transport Association of America (ATA), a trade organisation of the leading US airlines, is projecting an overall net profit of approximately $4-billion for passenger and cargo airlines in 2007 after earnings of between $2-billion and $3-billion in 2006.

A profitable 2006/07 would be the first back-to-back period of profitability since 1999/2000. US airlines lost a total of $10-billion in 2005.

”In addition to a healthy revenue environment, US airlines are seeing the results of painstaking, ongoing cost reduction efforts and balance-sheet repair,” said ATA chief economist John Heimlich, who nonetheless said caution is warranted.

”Although the industry is optimistic and well positioned to move forward, the reality is that events beyond airlines’ control could easily push them off course.”

The traditional full-service airlines such as Delta have been hurt by competition from low-cost startups such as Southwest and JetBlue, which do not have ”legacy” pension and healthcare costs and often have lower wages as well.

To streamline, Delta has trimmed about $5-billion from operating costs compared with 2002 levels. This has included pay cuts amounting to $1-billion, including concessions from pilots, and a reduction in the workforce from 66 500 in 2005 to 47 000.

Delta rejected a takeover bid last year from US Airways — which itself emerged from bankruptcy in a deal that merged with low-cost carrier America West — preferring to continue as a stand-alone company.

Standard & Poor’s rating service said Delta’s prospects are improving but that the airline will still have a low ”B” credit rating.

”Delta’s relatively rapid and successful reorganisation should leave the airline with lower operating costs, improving revenue generation, and a reduced debt load,” said S&P analyst Philip Baggaley.

”Still, the airline’s credit profile and its anticipated ‘B’ corporate credit rating continue to reflect also risks associated with participation in the price-competitive, cyclical, and capital-intensive airline industry; on below-average, albeit improving, revenue generation; and on significant intermediate-term debt and capital spending commitments.” — Sapa-AFP