Delta Air Lines Inc.'s decision to sell one of its regional carriers gives it some desperately needed cash, but the company is warning that a bankruptcy filing remains a distinct possibility.
Airline analyst Ray Neidl of Calyon Securities said Delta's $425 million sale of Atlantic Southeast Airlines Inc. to SkyWest Inc. is a good start, but more needs to be done.
"They have to somehow get some relief from debt maturities," Neidl said. "This gives them a little space to get the other things going."
Atlanta-based Delta, which has more than $20 billion in total debt and lease obligations, acknowledged as much in a filing with the Securities and Exchange Commission on Monday, shortly after it announced the ASA sale.
"Our preference has always been to avoid a restructuring under Chapter 11," Delta said. But, it warned there is "significant uncertainty" about whether it can raise enough additional cash to deal with an expected cash decline through the end of the year.
Delta, the nation's third-largest carrier, said the proceeds of the ASA sale will be used for general corporate purposes and to pay down $100 million of debt under its loan agreement with GE Commercial Finance and other lenders.
The sale, subject to regulatory review, is expected to close in September.
Also Monday, Standard & Poor's said it will replace Delta with Public Storage Inc. on the S&P 500 index later this week, citing the airline's reduced market capitalization of about $200 million. Public Storage is a real estate investment trust based in Glendale, Calif. Heavy equipment manufacturer Caterpillar Inc. will replace Delta on the S&P 100 index.
In the SEC filing, Delta said that even with the sale of ASA and other financing deals it is trying to work out, it could still be forced into bankruptcy. It noted that prior loan agreements with GE and American Express require it to maintain certain cash and earnings levels that it might not be able to maintain unless it can renegotiate parts of the agreements.
The SEC filing also updated investors on Delta's efforts to negotiate an agreement with a new Visa/MasterCard credit card processor. Its existing processing contract expires on Aug. 29.
In the filing, Delta said it reached a letter of agreement Monday to extend the current contract to Oct. 31 at the latest and to initiate a cash holdback for Visa/MasterCard receivables for tickets sold beginning Monday. The holdback would be at least $750 million if Delta keeps its current processor to the last possible moment.
That's the amount of a cash reserve that Delta said it would be required to set up as part of an agreement it is still trying to work out with a new processor. The reserve would be deposited with the new processor immediately upon start of the new contract, for tickets purchased using Visa or MasterCard but not yet flown.
The extension with Delta's current processor is still subject to final approvals.
Delta also noted in the filing the continued threat it faces from early retirements by its 6,000 to 7,000 pilots. It said that since January, roughly 565 pilots have retired, including 475 who did so early. Of those who retired early, 145 did so on Aug. 1, substantially more than historical levels, Delta said.
Delta, hit by high fuel costs, has lost nearly $10 billion since January 2001.
As for the deal with SkyWest, ASA will continue to serve Delta customers under a new 15-year agreement, with ASA's fleet of more than 150 aircraft continuing to fly Delta routes.
SkyWest Inc., based in St. George, Utah, is the parent company of SkyWest Airlines, which operates as an independently owned partner carrier to Delta. SkyWest has been a Delta Connection carrier since 1987.
Delta purchased ASA in 1999. Today, it provides 957 daily connection flights for Delta.
The terms of the sale call for $350 million in cash to be payable at closing, representing $330 million of the purchase price and $20 million relating to certain aircraft financing deposits.
Delta would receive the rest later, if it keeps using SkyWest for regional flights on the same contract terms, even in bankruptcy court.
Conversely, SkyWest would be entitled to retain the $125 million if Delta were to reject its Delta Connection agreement with either ASA or SkyWest Airlines in a Chapter 11 proceeding prior to the fourth anniversary of the closing of the transaction.