NEW YORK – Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWAC), the nation's No. 3 and No. 4 carriers, filed for bankruptcy protection Wednesday, entering Chapter 11 after years of high labor costs and rising fuel prices.
The filings put three of the nation's four largest airlines in bankruptcy court.
Mechanics for Eagan, Minn.-based Northwest have been on strike since Aug. 20.
Delta, which has struggled to avoid bankruptcy for several months and had said earlier this year it did not have enough cash to meet its liquidity needs in 2005, filed for Chapter 11 protection (search) in the U.S. bankruptcy court in the Southern District of New York. Atlanta-based Delta's woes have been compounded by a crushing debt load of more than $20 billion and one of the industry's biggest underfunded pension burdens.
The sector's woes went from bad to worse this month as refinery outages caused by Hurricane Katrina (search) sent jet fuel prices spiking. U.S. airlines are expected to post some $10 billion in losses this year.
"The action we have taken is a necessary and responsible step to preserve Delta's value for our creditors, customers, employees, business partners and other stakeholders," said Delta Chief Executive Gerald Grinstein (search) in a release. "Delta is open for business as usual and will continue normal operations throughout the reorganization process."
Founded in 1928, Delta became a top international player by taking over many routes from defunct Pan Am (search) in 1991. It has faced an uphill battle to recovery after getting hammered by the Sept. 11, 2001, attacks and the slowdown in flying that followed.
"Delta is overleveraged and they weren't going to stay out of bankruptcy, no way," said Ray Neidl, an analyst at Calyon Securities.
Both airlines would likely use bankruptcy to slash labor and pension costs, following in the footsteps of No. 2 U.S. carrier United Airlines (search), the main unit of UAL Corp.
The bankruptcies could put added pressure on other carriers including AMR Corp. (AMR), parent of American Airlines, by putting them at a competitive disadvantage as their bankrupt rivals shed costs and ditch pensions, analysts said.
On the other hand, other airlines would benefit if Delta and others cut back on domestic routes, getting rid of overcapacity which has made the U.S. airline sector the most troubled worldwide.
Like other airlines, Northwest has been hit by meteoric increases in jet fuel prices. But the fourth-largest airline also has the highest labor costs in the industry and has been losing money at the rate of $4 million a day.
"We had developed a plan to restructure Northwest outside of Chapter 11 and have been implementing that plan," Doug Steenland (search), Northwest president and CEO, said in a statement. "Unfortunately, in addition to an uncompetitive cost structure, our efforts have been overtaken by skyrocketing fuel costs."
Analysts said Northwest, which hired replacement workers to substitute for mechanics and cleaners who struck last month, could be using the threat of bankruptcy to get concessions that unions have been reluctant to grant at the bargaining table.
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, Minn.-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.
United and US Airways Group Inc. (search) 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.
Additional bankruptcy filings could pave the way for additional mergers and acquisitions in the sector, Merrill Lynch & Co. analyst Michael Linenberg said in a report.
On Wednesday, Northwest shares, which were hammered Tuesday on expectation of a bankruptcy filing, closed up 30 cents, or 19.1 percent, to $1.87 in busy trading on Nasdaq. Delta shares closed down 7 cents, or 9 percent, at 71 cents on the New York Stock Exchange.
Northwest's stock has plunged 86 percent so far this year, while Delta has lost 90 percent of its value.
On the debt markets, Northwest's 10 percent notes due in 2009 rose to 26 cents on the dollar, about 2-1/2 cents higher on the day, after tumbling more than 9 cents on Tuesday, according to MarketAxess.
Delta's 8.3 percent bonds due 2029 rose to 16 cents on the dollar, about 0.5 cent higher on the day, according to MarketAxess. They are still about 3/4-cent lower month-to-date.
Reuters and the Associated Press contributed to this report.