ATLANTA – Delta Air Lines' (DAL) warning of the possibility of bankruptcy doesn't necessarily mean the end is near, but it suggests the company's survival rests on reducing pilot costs within the next few months, industry observers said Tuesday.
Joel Denney, an airline analyst for Piper Jaffray & Co. (search) in Minneapolis, said he still believes the Atlanta-based carrier will ultimately reach an agreement with its pilots, who are among the highest paid in the industry.
"The question is, 'At what point do you draw a line in the sand?' " Denney said.
Clinton Oster, an Indiana University professor who specializes in airline economics, said that while Delta has enough cash to last until the summer 2005, it wouldn't be wise for the airline to wait that long to file for bankruptcy if it can't get an agreement.
"What would be the point if you know you're in a situation where you're going to continue to burn cash and there's no prospect of turning things around?" Oster said. "Why wait until you run out of cash? That just makes your recovery that much harder."
Delta has said repeatedly that it would fight to avoid bankruptcy. But on Monday, it signaled in a regulatory filing that it may have to file for bankruptcy protection if it doesn't get wage concessions from pilots.
Spokesman Anthony Black said Tuesday the airline had nothing new to add. A spokeswoman for the pilots union could not be reached for comment. On Monday, the pilots union said in a statement that it is willing to assist Delta in cutting costs and has attempted to negotiate with the company.
The nation's third-largest airline has lost more than $3 billion and laid off 16,000 employees in the last three years.
The company is seeking a 30 percent pay cut from pilots, who are offering only 9 percent and to forego a 4.5 percent raise they were to have received earlier this month.
According to the union, the annual payroll for 7,800 pilots was $1.5 billion prior to May 1, when pilots were due a 4.5 percent raise. Based on those numbers, the average annual pilot's salary would appear to be about $192,000 before the May raise, but company and union officials have refused to give a specific average. Another 1,060 Delta pilots are on furlough, but are expected to be called back in stages.
Alan Bender, a professor of airline economics at Embry-Riddle Aeronautical University (search) in Daytona Beach, Fla., said that major carriers in general have been struggling amid pressure from low-fare airlines, but he believes Delta's situation has been made worse by the pay issue and customer service concerns.
"Is there any other legacy carrier under quite the pressure Delta is? I'd say no," Bender said. "One, there are very few markets that they don't face competition from low cost airlines. And, two, their reputation for superior quality no longer exists."
As for the possibility of bankruptcy, Bender said he believes Delta has only six months left to reach a deal with pilots. Denney agreed that time is of the essence for Delta if it is to avoid bankruptcy.
"I don't think it's a matter of weeks, it's probably more like months," Denney said. "They're getting down to the point where they have to determine, Are they going to be able to get cost cuts outside of bankruptcy? If not, file and move forward."
In trading on the New York Stock Exchang (search), Delta shares rose 6 cents to close at $4.60.