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Delta, Northwest on the verge of bankruptcy

The boards of Delta Air Lines Inc. and Northwest Airlines Corp. are expected to meet Wednesday as the third- and fourth-largest U.S. air carriers teeter on the edge of bankruptcy.
/ Source: Reuters

The boards of Delta Air Lines Inc. and Northwest Airlines Corp. are expected to meet Wednesday as the third- and fourth-largest U.S. air carriers teeter on the edge of bankruptcy.

Bankruptcy filings by both would double the ranks of major U.S. airlines operating under court protection to four, dramatizing the industry’s struggle with soaring fuel prices and competition from low-cost carriers.

The sector’s woes went from bad to worse this month as refinery outages caused by Hurricane Katrina sent jet fuel prices spiking. U.S. airlines are expected to post some $10 billion in losses this year.

Atlanta-based Delta is expected to file for bankruptcy protection soon after the U.S. stock markets close Wednesday, a source familiar with the situation said. The airline declined to comment on press reports that its board would meet today to decide on a bankruptcy filing.

Northwest’s planned board meeting, disclosed by its pilots union Tuesday, will consider whether the airline should file for Chapter 11 protection from creditors or continue trying to restructure outside of bankruptcy.

Delta is seen as the weaker of the two troubled carriers, burdened by a debt load of over $20 billion, while Northwest’s woes are focused on high labor costs.

“Delta is overleveraged and they weren’t going to stay out of bankruptcy, no way,” said Ray Neidl, an analyst at Calyon Securities.

Cost of doing business
Both airlines are also struggling with pension costs which they say are unsustainable and which they would likely use bankruptcy to slash, following in the footsteps of No. 2 U.S. carrier United Airlines, the main unit of UAL Corp..

Bear Stearns & Co. analyst David Strine cut his recommendation on both companies’ shares to “underperform.”

He also lowered his rating on AMR Corp., parent of American Airlines, citing concern that the No. 1 U.S. carrier would become less competitive relative to rivals able to restructure, shed costs and ditch pensions in bankruptcy.

Analysts said Wednesday that while a Delta bankruptcy was seen as imminent, Northwest could be using the threat of a filing to squeeze concessions out of its unions, from which it is seeking some $1.1 billion in savings.

It has hired replacement workers to substitute for mechanics and cleaners who struck last month over the airline’s demands for steep wage cuts and layoffs.

“There’s a good chance (of a Northwest filing),” Neidl said, adding: “It depends on who wins that debate” at today’s board meeting.

Credit rating firm Standard & Poor’s said on Wednesday that Northwest’s failure to make $42 million in payments due on Tuesday made a bankruptcy filing likely, adding that it was probable as soon as Wednesday.

Adding to pressure on the Eagan, Minnesota-based carrier, Northwest would face a lien against its assets if it missed a $65 million pension payment due on Thursday, S&P said — unless the airline sought court protection.

J.P. Morgan and Morgan Stanley Wednesday both reiterated ”overweight” ratings on Northwest’s stock, betting that the airline would hold out for now.

United and US Airways Group Inc. are both already operating in bankruptcy, though both are hoping to emerge soon — US Airways with the help of a group of investors led by America West Holdings Corp.

Northwest’s stock has plunged 86 percent so far this year, while Delta has lost 90 percent of its value.