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Delta Air Lines bankruptcy would be hard

By Ed Brock

While an agreement between Delta Air Lines and the company's pilots' union is closer to reality, the company's head says bankruptcy is still a possibility.

If that happens, Clayton College & State University Dean of Business Bud Miller said, it could be bad for the company and the pilots.

"When you go into Chapter 11 (bankruptcy) a couple of things happen," Miller said. "Some of the bad news is control of the company shifts to the federal bankruptcy judge, and that judge has incredible power."

On Wednesday Delta and the union, the Air Line Pilots Association (ALPA), reached the tentative pact that includes $1 billion in concessions. While the agreement has been passed on to union members for ratification, the union's Master Executive Council Chairman John Malone explained the need for the concessions in a letter to those members.

"Let me say from the outset that it pained me to see such drastic changes made to almost every section of our contract; they are significant and will affect each of us and our families. However, your union and our economic experts were convinced that immediate relief was necessary to prevent a bankruptcy filing in light of the company's economic condition," Malone wrote. "Reaching an agreement outside of bankruptcy court allows us to have some control over any changes to our contract."

Malone called the agreement the "best alternative" for the union, and Miller also said the pilots do not want to negotiate in bankruptcy court.

If it reached that point, Miller said, the judge would have the power to "disaffirm" the pilots' contracts and could then demand even deeper pay cuts.

But Malone and Delta CEO Gerald Grinstein both said that the agreement, if ratified, still would not guarantee that the company would escape bankruptcy.

"Time is of the essence," Grinstein said in an internal message to employees. "But given the additional sacrifices that undoubtedly will be required if we file for bankruptcy, I believe it remains in our collective best interest to restructure our company on our own."

He also noted the Atlanta-based airline is "making significant progress" and is "on course" with its transformation plan.

Delta, the nation's third-largest air carrier, has been trying to restructure its $20.6 billion debt, though Grinstein did not elaborate publicly Thursday on the company's progress.

In bankruptcy the restructuring would go something like this, according to Miller.

The creditors to whom Delta owes money will be ranked according to seniority. The most senior creditors will be secured creditors, followed by un-secured creditors and then general creditors.

"The probability of getting anything goes down the more junior you are," Miller said.

Shareholders are often considered the most junior.

While the bankruptcy judge might appoint a trustee to handle the day to day operations of the company, the judge must approve all decisions, from buying a new plane to pay raises.

Sometimes companies and their creditors enter bankruptcy with an agreed upon plan, but other times management can present one plan and another party, such as labor or a creditor, can present a rival plan. Then it's up to the judge to decide.

"And when the judge decides, that's it, it's over," Miller said. "You don't appeal a federal bankruptcy judge."

Bankruptcy would certainly shake consumer confidence, Miller said. Though some passengers would not be bothered by the bankruptcy others "may be more hesitant" about choosing to fly Delta if they have other options.

Still, investors liked what they heard from the union, sending shares soaring. Shares were up 78 cents, or 15.8 percent, at $5.72 in morning trading on the New York Stock Exchange.

The tentative agreement with the pilots union includes a 32.5 percent wage cut effective Dec. 1 and no raises for the rest of the five-year pact.

Delta's 7,000 pilots are currently among the highest paid in the nation. They earn an average of $100,000 to $300,000 per year, according to the company.

Among other concessions are revisions in the pension plan and work rules. In return, pilots get options to purchase Delta stock that would give them an equity stake amounting to 15 percent of the company.

Delta's other major work groups, including flight attendants and gate and ticket agents, are not part of a union. The company has cut the pay of its other employees, and also has cut executives pay.

The proposal reached Wednesday was being reviewed by the pilots' union. The deal came after 15 months of negotiations that have intensified in recent days.

During the next two weeks, union members will be given details about the proposed agreement. The pilots will vote on the plan beginning Nov. 1 until Nov. 11, Malone said in his memo

Delta was expected to decide Wednesday whether to seek Chapter 11 protection from creditors. It said that could be delayed if an agreement was reached with ALPA. A company spokeswoman said Wednesday night no decision had been made.

Malone's memo says while there are no guarantees the airline will not file bankruptcy at some point, he hopes the agreement will "buy Delta additional time" to continue out-of-court restructuring efforts.

Tuesday was Delta's self-imposed deadline for debtholders to respond early to an exchange offer meant to give the airline breathing room. The deadline came and went without word from Delta on its progress.

The company had offered to exchange $680 million of its debt with new notes secured by $1.2 billion worth of debt-free aircraft, flight simulators and flight training equipment. The offer was made to holders of $2.6 billion in various forms of Delta debt.

Earlier this month, Delta extended a debt exchange offer to Nov. 18, but said it would give some creditors a better deal if they agreed to the terms by Tuesday. There still was no word Thursday about what the creditors' response has been to the offer.

Before the pilots deal was reached, the pilots had publicly offered up to $705 million in savings and had not released details of subsequent offers. In a regulatory filing earlier this month, Delta had said that to date the union's "counterproposals have been for substantially less than $1 billion." The company also had said in the filing that the union was seeking a stock option program that involves "substantially more equity" than management's proposal.

Delta has lost more than $6 billion since 2001, during which time it has also cut 16,000 jobs. Delta plans to cut up to another 7,000 jobs in the next 18 months. Last week, the struggling airline reported a $651 million loss in the third-quarter.

The Associated Press contributed to this article.