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Delta Sees Big Losses for Rest of 2005

Delta Air Lines Inc. (DAL) on Tuesday said it won't generate enough cash to meet its needs this year, raising new alarms the airline could have to file for bankruptcy in the next few months.

In a quarterly filing with the Securities and Exchange Commission (search), Delta also said it expects a "substantial" loss for the remainder of 2005 as it struggles with record-high fuel prices, low air fares and other cost pressures.

"Unless they sell at least one of their regional carriers, they will be forced to file for bankruptcy within the next six months," Standard & Poor's analyst Jim Corridore said. "And if they did sell a regional carrier, it still wouldn't change their overall situation. It would just buy them more time out of bankruptcy court."

Shares of Delta, which issued a similar warning in March, fell 9 percent in early-afternoon trading on the New York Stock Exchange (search).

Delta Air Lines (search), the No. 3 U.S. airline, also said it does not expect to achieve its goal of $5 billion in cost cutting until the end of 2006. The airline, which is cutting 7,000 jobs companywide, has previously said it expects to avoid a bankruptcy filing.

"This is the most aggressive language they've used to describe what's going on," said Helane Becker, airline analyst at Benchmark Co. "This definitely shows they are now one step closer to bankruptcy. My guess is that they will have to file for Chapter 11 in the third quarter of this year."

Becker said airlines tend to generate a lot of cash in the third quarter, when the travel season reaches its peak. "If they're going to have to file for bankruptcy, they will likely do it, and they should do it, when they have the maximum amount of cash on hand," she said.

Overall 2005 cash needs total $2.4 billion, not including operating losses. Delta has just $1.8 billion in cash, unchanged from the fourth quarter and $2.2 billion a year ago.

The Atlanta-based carrier, which has managed to narrowly avoid bankruptcy over the past year, said a need to bolster pension costs — underfunded by $5.3 billion — over the next three years would also worsen its cash problems.

Delta last week said it faces about $3.1 billion in pension costs between 2006 and 2008. But a bill under consideration by the U.S. Senate would stretch out employee pension payments over 25 years, and could ease the airline's liabilities.

In addition to $230 million in pension obligations for the rest of 2005, Delta also has to make $700 million in operating lease payments and $850 million in interest payments, and repay $640 million in debt as it comes due.

The airline also expects capital expenditures totaling about $690 million, including the purchase of 15 regional jets, according to the SEC filing.

In the past Delta has indicated it would be open to the idea of selling regional subsidiaries Cincinnati-based Comair (search) and Atlanta-based Atlantic Southeast Airlines (search), which analysts have estimated could fetch from $600 million to $1 billion.

"They are asking for $1 billion, but would be lucky to get half that," Becker said.

There are drawbacks to a sale, though.

The regionals are among Delta's few unsecured assets and could come in handy in the case of a bankruptcy filing to offer as collateral for financing, said Phil Baggaley, a credit analyst at Standard & Poor's.

Delta shares, which have fallen 50 percent since December, dropped 30 cents to $3, a 7-month low. The Amex Airlines Index, which was off 2.7 percent, has slid about 25 percent so far this year.