Delta and Northwest on brink of Chapter 11

Delta Air Lines is expected to file for bankruptcy protection on Wednesday while the board of rival Northwest will meet to examine strategic options ahead of its own possible filing.

Delta, the third-largest US carrier by revenues, has lined up about $1.7bn debtor-in-possession financing, which it hopes will allow it to restructure operations and repair its balance sheet.

Northwest’s efforts to secure funding had been thought to be less advanced as management grappled with the impact of a three-week strike by maintenance workers. However, the airline is understood to have secured a level of backing above its own initial estimates.

US Bank, which operates Northwest’s frequent flyer credit card programme, is among the backers, as is Airbus, which has financed a large part of the Northwest fleet. General Electric, which has participated in a number of US airline restructurings, is not believed to be involved.

The two airlines have sought additional concessions from employees in a bid to contend with the impact of rising fuel prices and the weak revenue environment created by intensifying competition from lower-cost rivals such as Southwest, AirTran and JetBlue.

The reorganisation plans are likely to see both airlines shrink domestic capacity in favour of more profitable international routes, though analysts cautioned this would still leave the US industry with overcapacity. Independence Air, the Washington-based airline, is also understood to be close to a filing though industry sources suggested this would lead to its liquidation.

Both carriers on Tuesday declined to comment on the timing of any filing under Chapter 11 of the US bankruptcy code, though have repeatedly warned they may need to seek protection. Analysts have pointed to a window of opportunity for filing between the Labor Day holiday and October 17, when new bankruptcy legislation is due to be enacted. Northwest on Tuesday began hiring permanent replacements for its 4,400 striking mechanics, who walked off the job on August 20 after rejecting the airline’s calls for steep job and pay cuts. The airline has raised its targeted annual savings from $1.1bn to $1.2bn. The Northwest board will on Wednesday be presented with an evaluation of the likelihood of securing the cuts before the October 17 deadline.

Northwest on Tuesday said it had withheld $23m in payments – mainly on aircraft-backed bonds – due on September 10-12, as well as $18.7m payment to Mesaba, a regional feeder airline, and saw this as a signal that it was also close to filing. It has a short grace period before these actions would break financial covenants. The carrier also has a $65m pension contribution payment due on Thursday.

Atlanta-based Delta, the third-largest US carrier by revenues, has been seen as weaker than fifth-ranked Northwest because of its larger exposure to domestic routes, more onerous pension obligations and the cash drain of renegotiating a deal with its own credit card vendors.

Delta lost $5.2bn last year and is targeting $5bn of cost cuts by the end of 2006 through changing its network and securing at least $1bn in cuts from pilots. It has held fresh talks with pilots in an effort to increase the savings.

United Airlines, the second-largest carrier after American, has been in Chapter 11 since December 2002, but hopes to emerge early next year. US Airways’ hopes to emerge later this month following its planned merger with smaller rival America West, whose shareholders on Tuesday approved the combination.

Airline restructuring experts have also warned that filings by Delta and Northwest would increase pressure on American Airlines and Continental Airlines to consider restructuring through the bankruptcy courts. Both carriers have a better cash position ahead of the slacker winter travel season, and have not indicated any plans to seek protection.

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