Delta Air Lines Inc. is living off borrowed cash and needs to lower its costs if it wants to avoid the fate of nearly a dozen carriers that have liquidated or been sold after filing for Chapter 11 since the 1980s, a restructuring expert testified Wednesday.
Timothy Coleman of The Blackstone Group LP, Delta’s main financial adviser since May 2004, spoke before an arbitration panel on the third day of hearings that will decide whether the nation’s third-largest carrier can void its contract with its 6,000 pilots so it can impose up to $325 million in pay and benefit cuts.
“It isn’t just about getting yourself out of bankruptcy, which we can do,” said Coleman, his firm’s senior managing director. “It’s about getting out and staying out and being able to operate on a viable basis.”
Coleman said Delta needs to have a cost structure comparable to competitors so it can afford to keep its ticket prices low. He provided a list of 11 airlines that filed for bankruptcy since 1982 but ultimately had to liquidate or be sold.
“Delta has to get itself to a point where it’s not just relying on outside capital,” Coleman said. “The liquidity they have right now is really borrowed liquidity.”
Blackstone is charging Delta $200,000 a month plus a fee of $10.5 million for its services, Coleman said.
The pilots union has said it will strike if its contract is rejected. A walkout would put the Atlanta-based carrier out of business, Delta has said. The panel, which is holding hearings at a Washington hotel, must decide on Delta’s motion to reject its pilot contract by April 15.
The pilots have offered a second round of long-term cuts, but strongly disagree on the amount Delta says it needs. The pilots previously gave Delta $1 billion in annual concessions in a five-year deal in 2004, and they believe they should receive some credit for the savings they say the company will reap if it terminates the pilots’ defined benefit pension plan.
The airline, which filed for Chapter 11 protection from creditors in New York in September, had asked the bankruptcy court in November to void the pilot contract. Shortly before a judge was set to issue a decision, the company and its pilots reached a deal on interim pay cuts.
That deal, equal to a little less than half of what the company is seeking on an annual basis, would be replaced by the long-term deal the two sides have been negotiating since December. They missed a March 1 deadline to settle on their own, sending the matter to arbitration.
In the latest negotiating proposals, the company has agreed to reduce its request to $305 million in cuts annually, while the union said it is offering $140 million annually. Delta has offered to reduce its concessions request further to $290 million if the pilots’ defined benefit pension plan is terminated, the company’s vice president of labor relations, Geraldine Carolan, testified Wednesday.
Delta has lost roughly $12.6 billion since January 2001.
Earlier Wednesday, Delta’s chief financial officer, Edward Bastian, spent part of a second day on the witness stand as union lawyer Bruce Simon continued to hammer away at him about the fate of the pilots’ pension plan.
The exchange between Bastian and Simon was tense, but did lead to a lighthearted moment when Simon asked Bastian whether he was aware that President Bush might veto any pension reform legislation that has special relief for airlines.
Bastian said he was aware of that, then responded, “I don’t know if that helps or hurts our success.” Most people in the room laughed.
According to the company, the average earnings of pilots last year who worked the full year was more than $157,000. But, according to the union, line pilots made on average $151,000 last year. The union figure excludes management pilots. The union said pilot earnings were inflated by record levels of overtime to make up for understaffing.
“For Delta senior executives to point out that the top paid hourly employees at an airline are mostly pilots is like pointing out that the top earners in a law firm are mostly lawyers,” union spokesman John Culp said in a statement.